Term Structure of Interest Rates
What the yield curve knows: expectations, term premia, and inversion as recession signal.
The Term Structure of Interest Rates model, in writing
Definition
The pattern of interest rates across maturities, explained by expected future short rates (expectations hypothesis) plus term premia for bearing duration risk.
Long rate ≈ average of expected short rates + term premium
The intuition
An upward slope is normal (compensation for time); an INVERTED curve says markets expect rate cuts, historically the single best recession predictor. Central banks read the curve as the market's forecast of their own future policy.
Exam tip
Name all three theories, expectations, liquidity premium, segmented markets, and use inversion as your applied example.
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