Typically, short-term interest rates are lower than long-term rates, so the yield curve slopes upwards, reflecting higher yields for longer-term investments.
This is referred to as a normal yield curve.
When the spread between short-term and long-term interest rates narrows, the yield curve begins to flatten.
Why do short term interest rates fluctuate more?
The expectations theory then implies that the yield curve is downward sloping. It follows that the short-term interest rate fluctuates more than the long-term rate. The expectations theory also explains why long-term bonds fluctuate more in price than short-term bonds.
Why are interest rates higher for longer terms?
The reason: A longer-term bond carries greater risk that higher inflation could reduce the value of payments, as well as greater risk that higher overall interest rates could cause the bond’s price to fall. Bonds with maturities of one to 10 years are sufficient for most long-term investors.
What affects long term interest rates?
Interest rates, bond yields (prices) and inflation expectations correlate with one another. Put simply, changes in short-term interest rates have more of an effect on short-term bonds than long-term bonds, and changes in long-term interest rates have an effect on long-term bonds, but not on short-term bonds.
What are short term interest rates?
Short-term interest rates are the rates at which short-term borrowings are effected between financial institutions or the rate at which short-term government paper is issued or traded in the market. Typical standardised names are “money market rate” and “treasury bill rate”.