When are investors more likely to require higher yields on long-term bonds?

Investors are more likely to require higher yields on long-term bonds when inflation expectations rise because higher expected inflation erodes the purchasing power of future interest payments. In an environment where inflation is anticipated to increase, investors demand higher yields to compensate for the loss of value in their returns over time. This adjustment ensures that their investments maintain their real value, meaning the return after accounting for inflation remains attractive.

In contrast, when short-term interest rates are low, the immediate yield environments for bonds may not pressure long-term yields to rise significantly. Periods of economic stability typically lead to lower uncertainty regarding inflation, which could stabilize yields rather than prompt an increase. In scenarios where corporate profitability increases, the focus might shift more towards equities for growth, which might not necessarily lead to a demand for higher long-term bond yields, as investors could seek higher returns from stocks instead. Thus, the relationship between inflation expectations and long-term yields is crucial in determining investor behavior.