Expectations Theory The Key to Understanding Yield Curves

1378 reads · Last updated: January 9, 2026

Expectations Theory is a theory that explains the term structure of interest rates. It posits that long-term interest rates reflect investors' expectations of future short-term interest rates. In other words, the yield on a long-term bond equals the expected average of a series of future short-term bond yields. According to the Expectations Theory, if investors expect future short-term interest rates to rise, long-term interest rates will be higher than current short-term rates; conversely, if they expect future short-term interest rates to fall, long-term interest rates will be lower than current short-term rates.

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