Interest rates on different maturities of bond are not the same. They vary depending on how long the bond has to run before it matures; for instance, the rate on a three-month treasury bill will probably be quite a bit lower than the rate on a 30 year treasury bond. The relationship between these different rates can be plotted on a chart, showing what is called the yield curve.
If you plot the different rates on a chart, you should get a smooth curve, starting relatively low, and rising towards the end of the period - hence the name, though the yield curve is more often shown as a table of values
Because US Treasury Bonds are the most important traded bonds, and are used as a benchmark for the rest of the market, the US Treasury Bond Yield Curve is a key way to understand what is happening in the bond market.
The yield curve almost always starts low, and increases with the length of time to maturity - that is, the rate of interest is lower on shorter term bills and bonds, and higher on longer term bonds. This is a normal yield curve. Historically, the yield on 20 year bonds averages two percent higher than the yield on short dated bonds and bills.
Typically, the increase in yields with time is steepest on the shorter periods, and the treasury bond yield curve flattens as it reaches longer-dated maturities.
Sometimes, though, rates on shorter term debt are higher than on long term bonds. This is known as an inverted yield curve, and shows that the market is expecting interest rates to fall. (If rates fall, investors will get a lower return on their money in a year's time than they do today.) It is usually seen ahead of an economic slow-down.
While we talk about 'interest rates going up' or down, rates of different maturities don't all move together or to the same extent. Economists study the shape of the yield curve to see what it is saying about expectations for the economy. For instance a steeper yield curve shows that buyers of bonds think the economy will improve sharply. This could predict an economic boom.
So the Treasury Bond Yield Curve is not only central to understanding the bond market - it can also help investors assess the prospects for the economy as a whole.