The yield curve

The yield curve

By looking at the current yield offered by short, intermediate and long-term bonds, you can get a feel for the bond market's yield curve. The yield curve is simply a plot of the yields offered by bonds that mature at different dates.

Normally, the further out you go out in maturity, the higher the yield you'll get. This increase in yields for longer maturities is called a normal yield curve.

However, note that the yield curve usually flattens out at around 10 years. That is, a 90-day bill generally pays less than a five-year note, but a 10-year bond normally provides about the same yield as a 30-year bond,.

Don't buy bonds with maturities above 10 years

For this reason, I don't think it's necessary to buy bonds with maturities above 10 years. Buying bonds with maturities of longer than 10 years is mostly for life insurance companies with known liabilities more than 10 years out, or for those who want capital gains through speculation on the direction of interest rates.

Occasionally short-term interest rates are higher than long-term interest rates. This produces a so-called inverted yield curve. Whenever you have an inverted yield curve, there's a good chance that a recession is on the horizon.