In the early 1980s, the Treasury yield curve had a severe downward slope with short-term yields near 20% and long-term yields below 15%. Explain how such a pattern might occur.
Campbell (1995) has stated that yield curve of treasury is downward sloped because of the expected inflation premium which is declining in trend. This declining trend of inflation premium is occurred and is significant in nature which may also overcome the interest rate risk premium too.
On the other hand, in history of over 20 years for Treasury bond yields, the gap in Treasury bill has always been increasing by 2% points after every three months and this gap increase let the treasury yield increases with the prediction that economic condition may improve quickly (Haubrich & Dombrosky, 1996).