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UNDERSTANDING YIELD CURVES
A yield curve is a line graph that illustrates the
relationship between the yields and maturities of
fixed income securities.
Yield curve graphs provide a quick way to review
and compare the yields that different types of fixed
income securities offer, and to determine investor
expectations for market conditions in the future.
They are created by plotting the yields of different
maturities for the same type of bond. The “spreads”
between the yields of different maturities are what
create the slope, or shape, of the yield curve for a
given type of security.
The chart below shows a “normal” yield curve. As you can
see, it is upward sloping. The longest-maturity securities offer
the highest returns while the shortest maturities offer the
lowest returns. This scenario is considered “normal” because
longer-term securities generally bear the greatest investment
risks and, as a result, “should” offer higher interest rates.
Of course this is not always the case. In addition to a normal,
upward sloping curve, a yield curve may also be inverted, or
NORMAL YIELD CURVE
6
Yield to Maturity %
0
1 2 3 4
For illustrative purposes only.
downward sloping, or it may be “humped,” as we will discuss
later in this paper.
TYPES OF YIELD CURVES
Yield curves may be created for any type of fixed income
security, including US Treasury securities, investment-
grade and high yield corporate securities, global bonds, and
municipal bonds. The yield curve for US Treasury securities
is considered a market benchmark, as it is often used as a
basic reference point by fixed income investors to evaluate
market conditions. It is also used as a benchmark to evaluate
the relative attractiveness of investing in non-US Treasury
securities. This is because US Treasuries, in theory, have no
credit risk, so the extra yield offered by a similar maturity, non-
US Treasury security should offer adequate compensation for
any additional risks incurred by the investor. The yield curves
for corporate securities are more typically known as “credit
curves” because, unlike yield curves that plot the yield and
maturity of a specific security, credit curves plot the yields
available on a universe of corporate bonds of a specific credit
quality, such as AAA-rated (the highest investment-grade
credit quality) through BBB-rated (the lowest investment-grade
credit quality), as well as for lower-quality, high yield bonds.
5 6 7 8 9 10 30
Term to Maturity: Years
COMPARING YIELD CURVES US GOVERNMENT VS. AAA-/AA-RATED CREDIT CURVES
Comparing the yield curves of different types of securities can
Yield to Maturity Spread over Govt Bonds
help investors determine the “relative value” of a bond and
can also help to create strategies to increase a portfolio’s total Govt AAA AA AAA AA
return. Investors may wish to compare the US Treasury yield 1-Year 4.00% 4.15% 4.45% 0.15% 0.45%
curve against AAA-rated and AA-rated corporate bonds, for 2-Year 4.25 4.45 4.90 0.20 0.65
example, to see how much additional yield they could capture 3-Year 4.50 4.75 5.20 0.25 0.70
by assuming some credit risk. (See charts to the right.) 5-Year 5.00 5.30 5.90 0.30 0.90
10-Year 6.00 6.50 7.25 0.50 1.25
One way to do this is to review the “spread,” or the difference
30-Year 7.00 7.70 8.50 0.70 1.50
in yields between different types of securities. The “spread”
columns in the chart to the right show the difference between 9
the yields on the benchmark US Treasury yield curve and Government

Yield to Maturity %
8
Comparative Yields AAA
the AAA- and AA-rated corporate bond curves, respectively. 7
6 AA
Investors can use this data to determine if the amount of
5
spread available today on a AAA- or AA-rated bond offers 4
enough additional yield over US Treasuries to make the 3
security an attractive investment. 1 2 3 5 10 30
Term to Maturity: Years
Investors can also evaluate spreads from a “current vs.
historical” standpoint. In other words, let’s say the spread For illustrative purposes only.
today between a 10-year US Treasury bond vs. a 10-year
AAA-rated corporate bond is +50 basis points. Is that typical?
Perhaps not. Perhaps the spread was only +35 basis points 8
7
Yield to Maturity %

a year ago. If that’s the case, the AAA-rated corporate bond, 6

Normal Yield 5
with the +50 basis points yield advantage today, looks
4
particularly attractive. 3
2
1
Finally, investors also use yield curves to compare the 0
relationship between maturities within the same type of 1 2 3 4 5 6 7 8 9 10 30
Term to Maturity: Years
security, such as between 2-year and 10-year US Treasury
securities (often called “2s/10s” for short). In the above
example, that spread is +175 basis points (4.25% vs. 6.00%).
Another maturity relationship that is frequently evaluated is 7
the spread between the ultra-short 3-month US Treasury bill 6
Yield to Maturity %

Inverted Yield 5
versus the ultra-long 30-year US Treasury bond. This spread
4
tells investors whether they are being paid enough in extra 3
yield to compensate them for the additional interest rate 2
risks associated with extending maturities within the same 1
0
type of security.
1 2 3 4 5 6 7 8 9 10 30
Term to Maturity: Years

6
Humped Yield 5
Yield to Maturity %

4
3
2
1
0
2 1 2 3 4 5 6 7 8 9 10 30
Term to Maturity: Years
 9
Government

% to Maturity %
8
Comparative Yields 7 AAA
6 AA
5
9

Yield
4 Government
EVERY YIELD CURVE TELLS A STORY 3
8

Yield to Maturity
Comparative Yields 7 AAA
The shape of a yield curve provides valuable information to 9 1 AA 2 3 5 10 30
6 Government

%
investors as to what other investors believe will take place in 8 Term to Maturity: Years
5

Yield to Maturity
Comparative Yields 7 AAA
the fixed income market in the future.
64 AA
3
5
1
Each yield curve shape tells a different story. A normal, 4 NORMAL YIELD2 CURVE 3 5 10 30
3 Term to Maturity: Years
upward-sloping yield curve implies that investors expect the
18 2 3 5 10 30
economy to grow in the future, and for this stronger growth to
7 Term to Maturity: Years

% to Maturity %
lead to higher inflation and higher interest rates. They will not 6
Normal Yield 5
commit to purchasing longer-term securities without getting
4
a higher interest rate than those offered by shorter-term 3
securities. A normal yield curve typically occurs when central 28

Yield
17
banks (such as the Federal Reserve in the United States) are 06

Yield to Maturity
Normal Yield 85
“easing” monetary policy, increasing the supply of money and 1 2 3 4 5 6 7 8 9 10 30
74

%
63 Term to Maturity: Years
the availability of credit in the economy.

% to Maturity % Yield to Maturity

Normal Yield 52
41
A normal yield curve signals that investors expect the economy 30
2 1 2 3 4 5 6 7 8 9 10 30
to expand. An illustration of this is shown to the right. 17 Term to Maturity: Years
0
6
Inverted Yield 5
1 2 3 4 5 6 7 8 9 10 30
An inverted yield curve, on the other hand, occurs when INVERTED YIELD CURVE Term to Maturity: Years
4
long-term yields fall below short-term yields. An inverted yield 3
curve indicates that investors expect the economy to slow 27
Yield

or decline in the future, and this slower Yield

growth may lead to 16
Inverted 075
Yield to Maturity

lower inflation and lower interest rates for all maturities. An 4

6 1 2 3 4 5 6 7 8 9 10 30
%

inverted yield curve typically indicates

Invertedthat central banks
Yield 3
Term to Maturity: Years
5
Yield to Maturity

are “tightening” monetary policy, limiting the money supply 2

4
1
and making credit less available. An inverted yield curve has 30
often historically been a harbinger of an economic recession. 2
1 1 2 3 4 5 6 7 8 9 10 30
Investors are willing to accept a lower interest rate now in 06 Term to Maturity: Years
return for being locked in forHumped YieldAn illustration of
years to come. 5
% to Maturity %

1 2 3 4 5 6 7 8 9 10 30
this is shown to the right. 4 Term to Maturity: Years
3
Finally, a “humped” yield curve indicates an expectation of HUMPED
26 YIELD CURVE
Yield

higher rates in the middle of Humped Yield

the maturity periods covered, 15
Yield to Maturity

064
perhaps reflecting investor uncertainty about specific
Humped Yield 53 1 2 3 4 5 6 7 8 9 10 30
%

economic policies or conditions, or it may reflect a transition

Yield to Maturity

42 Term to Maturity: Years

of the yield curve from a normal to inverted, or vice versa.
31
20
CONCLUSION 1 1 2 3 4 5 6 7 8 9 10 30
0 Term to Maturity: Years
Yield curves are created by illustrating the yields for a
particular type of security at different maturities. The US 1 2 3 4 5 6 7 8 9 10 30
Term to Maturity: Years
Treasury yield curve is used as a benchmark to which yield
curves for other types of bonds can be compared. The shape
of the yield curve for a fixed income security reflects market
factors including the direction of interest rates, risk, and
investor demand. Yield curves are widely used by investors
and portfolio managers as a snapshot of market conditions
and to compare different investment options.

3
 HELPING INVESTORS PARTICIPATE IN GLOBAL MARKET OPPORTUNITIES

At PGIM Investments, we consider it a great privilege and responsibility to help investors participate in opportunities across
global markets while meeting their toughest investment challenges. We’re part of PGIM, the 9th-largest investment manager
globally1 with more than $1 trillion in assets under management.2 This scale and investment experience allow us to deliver
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1
Pensions & Investments Money Managers list, 5/29/2017. Represents assets managed by Prudential Financial as of 12/31/2016.
2
PGIM data as of 12/31/2016.

RISK INFORMATION—Investing involves risk. Some investments have more risk than others. The investment return and principal value will fluctuate, and
shares, when sold, may be worth more or less than the original cost, and it is possible to lose money.
Fixed income investments are subject to interest rate risk, where their value will decline as interest rates rise.
The comments, opinions, and estimates contained herein are based on and/or derived from publicly available information. This outlook, which is for
informational purposes only, sets forth our views as of this date. The underlying assumptions and our views are subject to change. Past performance is not
a guarantee of future results.

For more information, contact your financial professional or visit our website at pgiminvestments.com.

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This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients.
The information is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. Clients seeking information regarding their particular
investment needs should contact a financial professional.

0218561-00005-00 PI2129 Expiration: 12/31/2018