More on Interest Rates

In finance the yield curve is a curve showing several yields or interest rates across different contract lengths (two month, two year, 20 year, etc…) for a similar debt contract. The curve shows the relation between the (level of) interest rate (cost of borrowing) and the time to maturity, known as the "term," of the debt for a given borrower in a given currency. Based on the shape of the yield curve, we have normal yield curves, steep yield curves, flat or humped yield curves, and inverted yield curves.

Israel Shekel yield curve: This graph is an example of a yield curve on Israeli Non-Linked Fixed Rate government bonds.

The yield curve is normal meaning that yields rise as maturity lengthens (i.e., the slope of the yield curve is positive). This positive slope reflects investor expectations for the economy to grow in the future and, importantly, for this growth to be associated with a greater expectation that inflation will rise in the future rather than fall. This expectation of higher inflation leads to expectations that the central bank will tighten monetary policy by raising short term interest rates in the future to slow economic growth and dampen inflationary pressure.