Bond Yields

frenchyWill · January 28th, 2011, 5:13 pm

Hi everyone,I wanted to know why yields are a little bit lower for the long-term bonds than for the medium-term bonds. The only quantitative explanation I've found was "because the convexity of a bond increases as the square of the maturity". But I can't see how this explains the lower yield.Thanks for your reply !

Martinghoul · January 28th, 2011, 6:15 pm

In which mkt are you observing such a phenomenon?

frenchyWill · January 28th, 2011, 6:49 pm

I don't know exactly, but I've often noticed yield curves like these :with a decreasing slope for the longest maturities.

Martinghoul · January 28th, 2011, 7:19 pm

In general, convexity is the prime suspect, indeed. Antti Ilmanen explains it a lot better than I could ever hope to, so I'd recommend you get your hands on his "Understanding the Yield Curve" series of papers.

DavidJN · January 29th, 2011, 3:57 pm

Old school types would say that the demand for long-dated fixed income instruments by insurance companies and pension funds who are in the business of managing long-tail liabilities outstrips the available supply. I find that to be a pretty convincing story. The laws of supply and demand then finishes this story.

frenchyWill · January 29th, 2011, 4:23 pm

As an actuary student, this is kind of ironic that I didn't think of this explanation :/Thank you D.JN and thank you Martinghoul for the pretty good references.