Schweser somewhere reckoned that the liquidity preference theory always meant a positive yield curve, but I think I disagree. That may usually be the case, but is it necessarily so? If the interest rate expectations are downwards, then even an adjustment upwards at the long end of the curve (because of liquidity preference) might not be enough to gain a positive slope. Thoughts?
i dont think liquidty pref will ALWAYS result in a pos yield curve. I think your statement is correct.
You are correct.
It results in a curve that is biased upwards, but does not remain positive all the time.
yes its always positive as there is always a “liquidity” spread added to yields, resulting in a positive slope
Even if forward rates were flat we would get a positive curve because of the spread, but we could get a negative one if the forward rates were lower…
CPAbeatsCFA Wrote: ------------------------------------------------------- > yes its always positive as there is always a > “liquidity” spread added to yields, resulting in a > positive slope What if yield curve is inverted? if 30 year yields are really low for whatever reason, then the spread added to it may still not be enough to get a positive curve…
i think you guys are mixing terms up and making it confusing. Liquidity theory says there is a premium to compensate investors. That is all it says The premium is added to the yield curve, which can be any shape.