Question

Question: The yield curve is upward-sloping. Can you conclude that investors expect short-term interest rates to rise? Why or why not?

Short answer

Answer

No, not necessarily

Step-by-step solution

Definition

As per the expectation hypothesis theory, the yield curve would slope upward whenever it expects the future rates to rise.

Evaluation of the yield curve under expectation hypothesis

No, not necessarily because the rising slope could be due to either expectations of future increases in rates or the demand of investors for a risk premium on long-term bonds. In fact the yield curve can be upward sloping even in the absence of expectations of future increases in rates.