Inverse Relationship of Interest Rates
April 21st, 2007 | by admin |Sometimes the relationship can be reversed
The reason investors may prefer long term bonds with lower yields to short term bonds is
1. Expectation that short term rates will fall in the future below existing long term rates.
- If investors bought short term rates and then their rate of interest fell then they would be worse off moving back into long term stocks.
- Long term investors prefer income certainty to capital certainty by accepting a lower yields on long dated securities they are obtaining long term income certainty
See also: Interest Rates and length of loan