The yield curve is a graphical representation of the relationship between the interest rates of bonds of different maturities. Specifically, it shows the relationship between the interest rates of short-term and long-term bonds. Normally, the yield curve slopes upwards, with long-term bonds having higher interest rates than short-term bonds.

The yield curve is closely watched by economists and investors because it can provide valuable information about the economy's future direction. In particular, the yield curve can be used to predict changes in economic growth, inflation, and interest rates. One of the main reasons the yield curve is so closely watched is that it can provide insight into future changes in monetary policy.

When short-term interest rates are higher than long-term interest rates, the yield curve is said to be inverted. An inverted yield curve often signals that a recession is coming, as investors anticipate that the central bank will need to cut interest rates to stimulate the economy. On the other hand, when the yield curve is steep, with long-term interest rates much higher than short-term interest rates, this can indicate strong economic growth and rising inflation. In this case, the central bank may respond by raising interest rates to cool the economy and prevent inflation from getting out of control.

The yield curve is an important tool for economic forecasting and can provide valuable information about the future direction of the economy. Investors and policymakers alike pay close attention to the shape and movements of the yield curve to gain insights into the market and make informed decisions.