What is the primary driver of the left-hand end of the yield curve?

The primary driver of the left-hand end of the yield curve is central bank interest rates. This segment of the yield curve typically represents short-term interest rates, which are significantly influenced by the monetary policy set by central banks, such as the Federal Reserve in the United States. When a central bank alters its interest rate policy—whether by raising or lowering rates—it directly affects the yields on short-term government securities.

For instance, when a central bank raises interest rates to combat inflation, the yields on short-term bonds increase in response to higher rates, leading to fluctuations in the left-hand side of the yield curve. Conversely, if the central bank lowers rates to stimulate the economy, the yields on these short-term bonds decrease.

In contrast, while market demand for bonds, inflation expectations, and government fiscal policy can all have significant impacts on various parts of the yield curve, they typically exert more influence on the middle or long ends of the curve. For instance, inflation expectations might affect longer-term rates as investors require a premium for the anticipated decline in purchasing power over time. Similarly, government fiscal policy can influence the longer-term outlook by impacting budget deficits and overall economic growth.