Yield curve flattening- abstract question

Question

I just stopped and thought about the current economic state, and yield curve in particular.

As you can see here, the yield curve is starting to flatten, means longer bonds demand is high, while short term bonds demand are low.

This is happening due to the "fear" from the upcoming short term economics, so the investors are selling short bonds and buying long bonds.

In US, the chance for government default are very low, as they can print more money and never declare a default, which will cause inflation (something that affect both short term and long term).

So why does the investors are buying longer bonds, with the same yield as short term yield, while the risk is so low? What is the rational behind getting longer bonds?

Thanks.

Answer 1

If an investor has a fixed amount to invest for a given time horizon, then a longer-term bond locks in the current long-term bond interest rate, but a short-term bond only provides this rate for a short time. After that, the short-term interest rate may be more or less favourable. Apparently the investors expect that the short-term rate will become less favourable for them after the current short-term bonds mature.

Investment is mostly about expectations, which may or may not be correct. Where the expectations come from is a more complicated question.