Question

Explain and describe the shape of the yield curve if investors think that short-term interest rates are likely to decrease in the future. Why does the yield curve have this shape?

Answer 1

Answer - If the investors have the knowledge about the lower interest rates for the future , the yield curve will be a downward sloping curve.

This will be downward sloping because of the decreasing interest rates. In the phase of the decreasing interest rates , investors want to lock in their investment before the interest rates go down further and they have to face lesser yield.

This happens in the phase of recession. Hence the yield curve will be downward sloping or inverted in this case.

answered by: anonymous