What is the effect on long-term bond yields when short-term rates rise?

When short-term interest rates rise, long-term bond yields typically increase as well. This relationship can be attributed to the expectation of future economic conditions and the bond market's response to changes in interest rates.

When short-term rates rise, it often signals that the central bank is tightening monetary policy, which can lead to higher borrowing costs and potentially slower economic growth. Investors might demand higher yields on long-term bonds to compensate for the increased uncertainty and risks associated with future inflation and economic conditions. Additionally, higher short-term rates may influence investors' perceptions of the appropriate level of yields for longer-term financing as they adjust their portfolios.

As a consequence, the yield curve can steepen as long-term rates rise in response to increases in short-term rates, reflecting these market dynamics. Therefore, the rising short-term rates signal a shift in monetary policy and economic outlook that prompts long-term yield increases.