<p>Short term yields go high because the Federal Reserve raises the overnight Federal Funds Rate (risk-free interest with one day duration), which they typically do when the economy is “overheated” causing higher inflation than they want. Then the market  prices the yields of all other debt based off that.</p>
<p>If the market is not demanding higher yields for the longer-term debt, it is because the market thinks the higher short term Fed rate is temporary. In other words, a recession is coming! And the Fed will be prompted to cut their rate soon to jump start the economy, and prevent unemployment from getting too high.</p>

CC BY-SA 4.0
2024-10-09T20:27:14.583Z
2024-10-09T20:27:14.583Z
user50791
<p>I understand the yield curve and why short term bonds have lower yields than long term bonds. I also understand why in an inverted yield curve, long term bonds have lower yields -- it is because investors want to &quot;lock-in&quot; higher rates and this drives up demand for long term bonds.</p>
<p>Now, for short term bonds, why do the yields rise? Let's say we're in a situation where interest rates are at their peak and the government won't increase them anymore. In this situation, shouldn't short term bond yields fall too? I thought only when interest rates rise do yields fall as a bond's market value falls.</p>

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2023-12-20T01:01:05.113Z
Short term yields only fall if the central bank acts. No one will be willing to hold risky bonds if risk less rates are paying more. Yields for the long run are also not low because investors want to lock in. It's mainly because of expectations of low inflation and sluggish growth. [This answer,](https://economics.stackexchange.com/a/54785/37817) is white detailed.
AKdemy
<bonds><treasuries><yield-curve>
In an inverted yield curve, why do short term yields go higher?
programmer
# In an inverted yield curve, why do short term yields go higher?

(Asked by: username_0 on 2023-12-18)

I understand the yield curve and why short term bonds have lower yields than long term bonds. I also understand why in an inverted yield curve, long term bonds have lower yields -- it is because investors want to "lock-in" higher rates and this drives up demand for long term bonds.

Now, for short term bonds, why do the yields rise? Let's say we're in a situation where interest rates are at their peak and the government won't increase them anymore. In this situation, shouldn't short term bond yields fall too? I thought only when interest rates rise do yields fall as a bond's market value falls.

**Tags:** bonds, treasuries, yield-curve

> **Comments:**
> **username_1**: Short term yields only fall if the central bank acts. No one will be willing to hold risky bonds if risk less rates are paying more. Yields for the long run are also not low because investors want to lock in. It's mainly because of expectations of low inflation and sluggish growth. [This answer,](https://economics.stackexchange.com/a/54785/37817) is white detailed.  

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## 1 answers

### Answer by username_2 on 2024-10-09. Score: 0

Short term yields go high because the Federal Reserve raises the overnight Federal Funds Rate (risk-free interest with one day duration), which they typically do when the economy is “overheated” causing higher inflation than they want. Then the market prices the yields of all other debt based off that.

If the market is not demanding higher yields for the longer-term debt, it is because the market thinks the higher short term Fed rate is temporary. In other words, a recession is coming! And the Fed will be prompted to cut their rate soon to jump start the economy, and prevent unemployment from getting too high.


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