Expectations Hypothesis

The Expectations Hypothesis is a theory about how interest rates are determined in the bond market. It suggests that the interest rates on long-term bonds reflect what investors expect future short-term interest rates to be. In other words, if investors believe that short-term rates will rise, long-term rates will be higher than current rates, and vice versa. This theory helps explain the relationship between short-term and long-term interest rates, indicating that future expectations play a crucial role in shaping current financial decisions and market behaviors.