Yield curves come in different shapes, but there are three main types that you should be familiar with. The first is the normal yield curve. This one slopes upward, meaning yields increase with time to maturity. It's pretty intuitive. Bond holders face more uncertainty and therefore more risk with longer term bonds, so they expect a higher return or yield as compensation. Since this upward slope is the most common shape it's referred to as the normal yield curve.

Next is the inverted yield curve where the curve slopes downward. In this case, short-term bond yields are higher than long-term yields. This can't be explained by risk aversion like the normal curve, but there is still a logical explanation. If investors expect interest rates to drop significantly in the near future, they will prefer locking in today's higher yields for a longer time by buying long-term bonds. This increased demand pushes up long-term bond prices, which in turn drives down their yields.

Creating an inverted shape with short-term yields higher than long-term ones. The third type is called a flat yield curve, as the name suggests in a flat curve, yields across all maturities are very similar. Making the curve appear like a straight line.