Why equilibrium yield curves should be flat

Once central banks’ key interest rates have been stabilised (at the “terminal rate”), long-term interest rates will also stabilise, and we believe that yield curves will then be flat (term premia will be zero). The reasons why equilibrium yield curves should be flat are as follows: Demand for risk-free bonds is strong; The supply of risk-free bonds has been reduced by quantitative easing; Inflation is not expected to rise in the medium term; The variability of long-term interest rates has been reduced by central bank action, which reduces the term premium.