Expectations theory of the yield curve

It is a bit of a mouthful, but the expectations theory basically says that the yield curve will reflect the spot rates and that spot rates reflect the markets expectation of forward rates.

So expectations as to the future actually play an integral role, and hence they are used in the name of this theory of the yield curve.

Many people believe that pure expectations theory is pretty much the only determinant factor of the shape of the yield curve.

Many people start to get a bit confused by the talk of the yield curve its shape and the determining factors, so don't worry if it all starts to get a bit confusing, just being aware of what expectations theory is and what it says and why is useful enough.

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