An Investment Dealer's fixed-income desk observes a sudden, sharp steepening in the 20-to-30-year segment of the government yield curve, while short-term rates remain unchanged. Which of the following best explains this phenomenon under the Market Segmentation Theory?

Question

Accepted Answer

Correct. The Market Segmentation theory states that the yield curve is shaped by isolated supply and demand within specific maturity habitats. Pension funds and life insurers operate in the long end. A massive liquidation (selling) of 30-year bonds increases supply in that habitat, driving prices down and yields up, steepening the curve.

An Investment Dealer's fixed-income desk observes a sudden, sharp steepening in the 20-to-30-year segment of the government yield curve, while short-term rates remain unchanged. Which of the following best explains this phenomenon under the Market Segmentation Theory?

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