I understand the yield curve and why short term bonds have lower yields than long term bonds. I also understand why in an inverted yield curve, long term bonds have lower yields -- it is because investors want to "lock-in" higher rates and this drives up demand for long term bonds.

Now, for short term bonds, why do the yields rise? Let's say we're in a situation where interest rates are at their peak and the government won't increase them anymore. In this situation, shouldn't short term bond yields fall too? I thought only when interest rates rise do yields fall as a bond's market value falls.

  • $\begingroup$ Short term yields only fall if the central bank acts. No one will be willing to hold risky bonds if risk less rates are paying more. Yields for the long run are also not low because investors want to lock in. It's mainly because of expectations of low inflation and sluggish growth. This answer, is white detailed. $\endgroup$
    – AKdemy
    Dec 20, 2023 at 1:01


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