Corporate Finance

Upward-sloping yield curve

A yield curve may be upward sloping because of:

1. Future expectations: If future short-term rates are expected to increase then the yield curve will be upward sloping

2. Liquidity preference: It is argued that investors seek extra return for giving up a degree of liquidity with longer-term investments. Other things being equal, the longer the maturity of the investment, the higher the required return, leading to an upward sloping yield curve.

3. Preferred habitat/market segmentation: Different investors are more active in different segment of the yield curve. For example, banks would tend to focus on the short-term end of the curve, whilst pension funds are likely to be more concerned with medium and long-term segments. An upward sloping curve could in part be the result of a fall in demand in the longer-term segment of the yield curve leading to lower bond prices and higher yields.