The slope of the yield curve in the United States and Germany: The roles of short-term interest rate expectations and the term premium

We analyse the slope of the US and German yield curves between interest rates on 10-year and 2-year government bonds. The slope of the yield curve depends on: Short-term interest rate expectations. If, for example, investors believe that short-term interest rates are going to rise beyond a 2-year horizon, the yield curve will be sloping upwards between 2  years and 10 years; The term premium. If the expected variability of long-term interest rates and therefore normally of inflation and short-term interest rates is high, a term premium is added to long-term interest rates and the yield curve is steepen ed . We try to break down the explanation of the slope of the yield curve in the United States and Germany between short-term interest rate expectations and the term premium. We find that the term premium plays a significant role. It is best represented in the United States by the variability of 10-year interest rates and in Germany by the variability of inflation.