Why do upward and downward sloping curves mean this?
Hi guys. I've come to learn that an upward sloping curve generally indicates that the financial markets expect higher future interest rates. On the other hand, a downward sloping curve indicates expectations of lower rates in the future.
But what's the reason why it works like this?
1. Bond yields rise with higher future interest rates because investors would demand it. Otherwise they´d just deposit their money in a bank for a relatively high interest rate. The decreasing demand for bonds pushes the bond yields up and the price for bonds down.
2. Bond yields shrink with lower future interest rates because there is less interest to be earned by depositing money in the bank, hence people move to (riskier) securities in order to get their required return. The increased demand for bonds pushes the bond yields down and the price for bonds up.
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