posted by terra .
Suppose you observe the following
Maturity 1 year Yield 6.0%
Maturity 2 year Yield 6.2%
Maturity 3 years Yield 6.4%
Maturity 4 years Yield 6.5%
Maturity 5 years Yield 6.5%
What does the market expect will be the interest rate on 1yr. securities 1 year from now? What does the market expect will be the interest rate on 3yr. securiites 2 years from now?
I would say, "cant tell" The market could expect interest rate 2 years from now to be 6.0%. However, seeing two years in the future is more risky than 1 year. So, the higher yield in year 2 could easily be explained by the higher risk. Ditto for 3+ years.