The recent behavior of longer-term yields Some discussion of the arithmetic of longer-term yields provides a useful perspective on recent developments in bond markets. The ten-year Treasury yield, for example, can be viewed as a weighted average of the current one-year rate and nine one-year forward rates, with the weights depending on the coupon yield of the security.
As I will discuss, each of these forward rates can be split further into (1) a portion equal to the one-year spot rate that market participants currently expect to prevail at the corresponding date in the future, and (2) a portion that reflects additional compensation to the bondholder for the risk of holding longer-dated instruments.