In volatility theory we learnt that longer maturities bonds have higher volatility
But the term structure of yield volatility is downward sloping
Can someone explain this
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Longer maturity bonds are often more volatile due to their sensitivity to changes in interest rates, making them riskier to investors. However, the term structure of yield volatility shows shorter-term yields as more volatile than longer-term yields. This is because short-term yields react strongly to market expectations and economic indicators, have higher liquidity, and are perceived as riskier due to factors like credit and reinvestment risk. Overall, while longer maturity bonds may have higher price volatility, shorter-term yields tend to be more volatile.
Essentially,
In general ,term structure of upward sloping but it’s can be downward sloping because changes in fiscal & monetary policy like when central bank cut the interest rate. Because of XYZ reasons so, investors expect lower future interest rates, seek safety in longer-term investments during uncertain times. when central banks lower short-term rates.
I hope you understand……