Which term best describes the relationship of bond yields to economic expectations?

The term that best captures the relationship of bond yields to economic expectations is indeed inverse. This relationship reflects the principle that when economic expectations improve, such as anticipated growth or inflation, bond yields tend to rise. Investors demand higher yields on bonds to compensate for the increased risk associated with these expectations.

Conversely, when economic outlooks are pessimistic, bond yields typically decrease. In this scenario, investors seek the safety of bonds, increasing their demand, which pushes prices up and consequently lowers yields. This inverse relationship illustrates how shifts in economic sentiment and expectations directly influence bond yields.

A term like indeterminate would imply that there is no clear relationship, which contradicts the established understanding. Proportional suggests that yields change in direct correlation to economic expectations, which is not accurate. Linear suggests a constant slope or relationship, which does not properly characterize the diminishing sensitivity of bond prices as yields rise or fall. Thus, the characterization of the relationship as inverse is the most accurate reflection of how bond yields respond to shifts in economic expectations.