Yield Curve. Anyone good at finance?

[FFactory0x]

THIS IS NOT HW!!!!

its just a question in a review packet for a test on Friday and i want to get this part on thre test right. Can you explain

While reading the Wall Street Journal Jack notices the yield curve is downward sloping.
Grace tells him this means interest rates are expected to fall while Will tells him it means
interest rates will be constant. Karen tells him you cannot interpret what will happen to
future interest rates based on the yield curve. Using the theories for your answer, explain
who is correct and why?

 

[Hyudra]

well... looking at a regular point of view..... downward sloping or inverted means that longer term bonds yield less than the short term bonds. Also individuals and institutions are purchasing long term bonds, which therefore keep the price of the long term bonds high and the yields of those bonds low. Short term bonds are not as in demand as long term, so they yield higher returns.

I'm probably gona say Karen is correct, since it's the federal open market committee choice to change rates, and they factor in all types of stuff like inflation, GDP growth, ect.

Rates could stay constant.... but I don't think they would fall.

 

[iwantanewcomputer]

grace... traders expect interest rates to fall, otherwise they would adjust the yields to pay more for taking on higher risk

<----only took econ 101 and 102 so don't count on it

 

[FelixDeCat]

>Grace tells him this means interest rates are expected to fall

While the fed may attempt to control interest rates, they are just a factor in the world rate market. Apparently traders are expecting yields to fall and are bidding bonds higher in anticipation of it. We have seen this going on for the past two years.

While your textbook answer might point to Karens answer as being the correct one because while the market might be betting rates will fall, they could be wrong. In the real world however, I would agree with Grace since you dont stay in the bond trading business long being wrong too many times.

Bad traders tend to go broke.