The yield curve
What the curve plots, how its shapes are commonly read, and what India's looked like on 1 September 2026
Indian yields as on 1 September 2026 (Treasury bills: auction of 27 August 2026)
Verified 12 October 2026
For training and education only. Not investment advice.
Trainer notes
Ask the room: should a 30-year loan to the government pay more than a 3-month loan, or less? Most will say more. Then ask whether it has ever been the other way round. This deck covers both cases.
The yield curve is one borrower's interest rates, lined up from the shortest loan to the longest.
The borrower is usually the government. On one day, the curve shows what the market charges it for three months, one year, ten years and thirty years.
Trainer notes
Stress 'one borrower' and 'one day'. Because the borrower is the same all along the line, the differences between the points are about time, not about credit risk.
How to read the picture
One borrower
Every bond on the curve comes from one issuer, usually the government, so the only thing that differs is time.
Across: maturity
From Treasury bills of a few months on the left to bonds of 30 years or more on the right.
Up: yield
Each bond's yield to maturity on that day. This is the market yield, not the coupon printed on the bond.
Slope
A long yield minus a short yield, also called the term spread. It is positive when the curve slopes upward.
Take-away: A yield curve is a snapshot of one day. Tomorrow's curve will be a little different.
Trainer notes
Treasury bills are government borrowings of up to one year, sold at a discount. Dated government securities run from a few years to several decades. Curves can also be drawn for other borrowers, such as AAA-rated companies; the gap between such a curve and the government curve is the credit spread from the earlier deck.
India's yield curve on 1 September 2026
| Yield (%) | |
|---|---|
| 91 days | 5.26 |
| 182 days | 5.62 |
| 364 days | 5.80 |
| 2029 | 6.44 |
| 2031 | 6.58 |
| 2036 | 6.96 |
| 2041 | 7.11 |
| 2055 | 7.55 |
Read the chart
- The curve slopes upward: 5.26% for 91 days, 7.55% for the bond maturing in 2055.
- The 10-year bond, maturing in 2036, yields 6.96%.
- RBI's repo rate was 5.25% on that date. The shortest yield sits close to it.
- Years on the axis are maturity years of the government bonds RBI lists.
Source: RBI Current Rates. Government securities as on 1 Sep 2026; Treasury bills at the cut-off yield of the last auction (27 Aug 2026).
Trainer notes
The eight points are the ones RBI publishes on its home page: three Treasury bills and five dated securities (6.20% GS 2029, 6.36% GS 2031, 6.94% GS 2036, 7.06% GS 2041, 7.24% GS 2055). They are roughly 3, 5, 10, 15 and 29 years from maturity. The points are evenly spaced on the slide but not in time, so the true curve is steeper at the left than it looks. Refresh these at each month-end, using market figures that are at least 30 days old. Market figures are shown with a lag of at least 30 days, in line with SEBI's norms on price data used for education.
Measuring the slope
THE YIELDS
The slope is one yield minus another.
364-day Treasury bill: 5.7968% 10-year bond (2036): 6.9570% 30-year bond (2055): 7.5520%
- 10-year minus 364-day: 6.9570 − 5.7968 = 1.1602 percentage points, or about 116 basis points.
- 30-year minus 10-year: 7.5520 − 6.9570 = 0.5950 percentage point, or about 60 basis points.
- The first gap covers about 9 years, the second about 19. The curve rises faster at the short end and flattens further out.
- If a long yield were below a short yield, the answer would be negative. That is an inverted curve.
Result: On that day both gaps were positive: the curve sloped upward. Their size changes every day.
Figures: RBI Current Rates, 1 September 2026; Treasury bill at the cut-off yield of the 27 August 2026 auction.
Trainer notes
There is no single official 'slope'. In India people often quote the 10-year yield against the repo rate or a Treasury bill. In the United States the common pairs are 10-year minus 2-year and 10-year minus 3-month. Always ask which two points are being compared. '30-year' here means the 7.24% GS 2055, which has about 29 years left.
Three shapes, and how they are read
| Shape | What you see | A common reading | Keep in mind |
|---|---|---|---|
| Normal | Long yields above short yields. | Lenders are paid extra for lending longer. The market does not expect short rates to fall sharply. | This is the usual shape. It is not a sign that growth will be strong. |
| Flat | Short and long yields close together. | Often seen after the central bank has raised short rates, when the market doubts they will stay that high. | A flat curve can stay flat, steepen again or invert. |
| Inverted | Short yields above long yields. | The market expects short rates to fall later, usually because it expects slower growth or lower inflation. | It shows what the market expects. Expectations can turn out wrong. |
Readings as commonly described in central-bank research, for example Federal Reserve Bank of New York, 'The Yield Curve as a Leading Indicator: Frequently Asked Questions' (2005).
Trainer notes
These are readings, not rules. The New York Fed paper says the slope of the US curve has had a consistent negative relationship with later economic activity, with a lead of about four to six quarters, and that up to 2005 it had preceded essentially every US recession since 1950 with one false signal. That history is why an inversion gets attention. The next slides show a recent case that did not follow the script. A curve can also be humped, with middle maturities yielding the most.
Why long yields are usually higher
Expected short rates
A 10-year yield starts from what the market expects short-term rates to average over those ten years.
Term premium
The extra yield for holding a long bond instead of a series of short ones. Fed researchers define it as the yield minus that expected average.
Bigger price swings
Long bonds have a higher duration, so their prices move more when yields change. Holders usually want to be paid for that.
Inflation uncertainty
Nobody knows what inflation will be in ten or thirty years. The further away a payment is, the more that uncertainty matters.
Take-away: The term premium cannot be seen directly. It is estimated with models, and estimates differ.
Source for the definition: Board of Governors of the Federal Reserve System, 'Three-Factor Nominal Term Structure Model' data page.
Trainer notes
Put simply: long yield = expected average short rate + term premium. Steps 3 and 4 are the main reasons usually given for a premium. Supply and demand matter too: heavy long-dated government borrowing, or strong buying by insurers and pension funds, can move long yields. When the market expects short rates to fall by more than the premium, the long yield ends up below the short yield, and the curve inverts.
A past case: the US curve inverts
| 1 July 2021 | 3 July 2023 | |
|---|---|---|
| 3 months | 0 | 5 |
| 1 year | 0 | 5 |
| 2 years | 0 | 5 |
| 5 years | 1 | 4 |
| 10 years | 1 | 4 |
| 30 years | 2 | 4 |
Read the chart
- July 2021: 0.05% for 3 months and 1.48% for 10 years. An upward slope.
- July 2023: 5.44% for 3 months and 3.86% for 10 years. Short yields sat above long yields.
- In between, the US central bank raised its policy rate from near zero to 5.00%-5.25%.
- The 3-month yield rose 5.39 percentage points. The 10-year rose 2.38.
Sources: Board of Governors of the Federal Reserve System, Treasury constant-maturity yields, via FRED (Federal Reserve Bank of St. Louis); Federal Reserve, open market operations page.
Trainer notes
The Federal Reserve began raising its target range in March 2022 (to 0.25%-0.50%), reached 5.25%-5.50% in July 2023 and first cut it in September 2024. The short end of the curve followed the policy rate up. Long yields rose much less; a common reading is that the market did not expect rates to stay that high for ten years. This is a past case used to show the mechanics; it says nothing about what any curve will do next.
The 2022-24 US inversion in numbers
A widely quoted measure of slope is the US 10-year Treasury yield minus the 2-year yield.
- TRADING DAYS BELOW ZERO
- 537Below zero on every trading day from 6 July 2022 to 26 August 2024.
- DEEPEST POINT
- −1.08Percentage points, on 3 July 2023: 3.86% minus 4.94%.
- US RECESSIONS AFTER 2020
- NoneNBER lists no US business-cycle peak after February 2020 (read 12 Oct 2026)
- THE SAME GAP, 1 SEP 2026
- +0.40Percentage point: 4.79% minus 4.39%. Positive again.
Sources: FRED, Federal Reserve Bank of St. Louis, series T10Y2Y, DGS10 and DGS2 (Federal Reserve Board data); NBER, 'US Business Cycle Expansions and Contractions', as read on 12 Oct 2026.
Trainer notes
The gap was also briefly below zero on 1 and 4 April 2022, and on 3 and 5 September 2024. The NBER dates recessions only after the event, sometimes a year or more later, so 'none dated' is the position as of today, not a final verdict. The lesson is modest: an inversion is a reading of market expectations. It has often come before a US recession, but it does not set a date and it is not a certainty. Market figures are shown with a lag of at least 30 days, in line with SEBI's norms on price data used for education.
If you learnt this from older material
What some older notes say
- Long loans cost more because the borrower's future is less certain.
- A curve inverts because cash is tight and firms pay up for short-term money.
- An inverted curve returns to normal; that return is called steepening.
What holds now
- On a government curve it is about time: expected rates plus a term premium.
- The short end follows the policy rate. Long yields reflect where rates are expected to go.
- Steepening means the long-short gap widens. It can start from any shape.
Take-away: A curve can stay inverted for a long time: the US 10-year minus 2-year gap did for over two years.
Sources: FRED series T10Y2Y (Federal Reserve Board data); Federal Reserve Board term structure model page.
Trainer notes
Tight liquidity can push very short rates up for a while, so the older explanation is not wrong, only incomplete. For a government curve the main drivers are the policy rate at the short end and expectations plus the term premium at the long end. Steepening also has two forms: long yields rising faster than short ones, or short yields falling faster than long ones.
Four things people get wrong
Misconception'An inverted curve means a recession.'
What is trueIn the US it has often come before one, but not every time. No recession has been dated after the 2022-24 inversion so far.
Misconception'The curve predicts interest rates.'
What is trueIt shows what the market expects today, plus a term premium. Expectations change, and they can turn out wrong.
Misconception'RBI sets the whole curve.'
What is trueRBI sets the repo rate, which anchors the shortest yields. Longer yields are set by buyers and sellers in the market.
Misconception'Long bonds yield more, so pay more.'
What is trueThe extra yield is payment for bigger price swings. Over a year, a long bond's price can fall by more than its interest.
Trainer notes
On the third point: RBI can also influence longer yields by buying or selling government bonds in the open market, but it does not fix them. On the fourth: see the duration deck. None of this is a view on which maturity anyone should hold.
Check yourself
Question 1: On one day the 364-day Treasury bill yields 5.80% and the 10-year government bond yields 6.96%. What is the slope between them, and what shape is that?
Answer: 6.96% − 5.80% = 1.16 percentage points, or 116 basis points. The long yield is above the short yield, so this part of the curve is normal (upward sloping).Question 2: Why is a yield curve drawn with the bonds of one borrower, usually the government?
Answer: So that the only difference between the points is time to maturity. If borrowers were mixed, differences in credit risk would be mixed in with the effect of time.Question 3: A client says: 'I read that the yield curve has inverted, so a recession is certain.' What is a fair reply?
Answer: An inverted curve is commonly read as the market expecting short rates to fall later. In the US it has often come before a recession, but not every time: the 10-year minus 2-year gap was below zero from July 2022 to August 2024 and no recession has been dated since. It is a reading of expectations, not a certainty, and we do not forecast.
Sources and disclaimer
Sources for the figures in this explainer
- Indian yields: RBI Current Rates (page archived 2 Sep 2026). Government securities as on 1 Sep 2026; Treasury bills at the cut-off of the 27 Aug 2026 auction. Repo rate that day: 5.25%.
- US Treasury yields and the 10-year minus 2-year gap: Federal Reserve Board data via FRED, Federal Reserve Bank of St. Louis (series DGS3MO to DGS30 and T10Y2Y).
- US policy rate changes: Board of Governors of the Federal Reserve System, open market operations page.
- US business-cycle dates: National Bureau of Economic Research, 'US Business Cycle Expansions and Contractions', as read on 12 October 2026.
- Term premium definition: Federal Reserve Board, 'Three-Factor Nominal Term Structure Model' page. Record of the US curve: New York Fed, yield curve FAQ (Estrella, 2005).
- This deck describes past and current data. It does not forecast interest rates, growth or returns.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).