Yield Curve Risk: What It Is and Why It Matters

 Investing in fixed income securities is often about minimizing risk and maximizing return. For investors with a long time horizon, the potential for interest rates to rise allows fixed income securities to provide current income and future income from the principal. For investors with a shorter time horizon, the current yield of fixed income securities offers the opportunity for current income. The yield of fixed income securities is affected by the maturity of the yield curve.

The yield curve is the relationship between the yield on bonds of different maturities (e.g. 1-year, 5-year, 10-year, 30-year) and their respective yields. It is a useful concept for investors to understand and is often used as a predictor of future economic conditions. The risk of yield-curve maturity is a phenomenon in which an investor’s yield curve positioning can result in uneven returns, regardless of the actual yield curve movement.

As fixed-income investors, we are always searching for yield. And this search often leads us to fixed income securities with longer durations, such as bonds. The longer duration of these bonds means that we are exposed to the risk of yield-curve maturity. If interest rates were to rise, these bonds would likely see their yields decline, thereby reducing our total returns.

The yield curve is a graphical representation of the interest rates on different maturities of fixed-income securities. The yield curve typically slopes upwards — meaning that the longer the term of the fixed-income security, the higher the yield. This reflects the market’s expectations of future interest rates: long-term yields are higher than short-term ones because the market expects long-term interest rates to be higher than short-term ones in the future. The yield curve can be steeper or flatter than the yield on a single maturity — for example, the yield on 5-year security may be higher than the yield on 1-year security, but the yield on 20-year security may be lower than the yield on

There are several risks that investors in fixed-income securities have to consider. Among these risks is the risk of yield-curve maturity, which refers to the phenomenon in which long-term interest rates increase as the maturity of the security increases. When this happens, the total yield of the security decreases, which can have a significant impact on the total return of the investment.