Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Market Segmentation Theory

What it is:

Market segmentation theory posits that the behavior of short-term and long-term interest rates are mutually exclusive.

How it works (Example):

Market segmentation theory suggests that the behavior of short-term interest rates is wholly unrelated to the behavior of long-term interest rates. In other words, a change in one is in no way indicative of an immediate change in the other. Both must be analyzed independently. Accordingly, the yield curve reflects the market supply and demand for Treasury bonds of a certain maturity only.

Why it Matters:

Market segmentation theory suggests that it is impossible to predict future interest rate outcomes based on short-term interest rates. Moreover, long-term interest rates (for example, the rate of the 30-year Treasury bond) only express market expectations and do not indicate that a definite outcome will occur.

Related Terms View All
  • Quitclaim Deed
    For example, let's say John Doe and Jane Doe are married and live in a house that they...
  • Natural Capital
    Let's say Company XYZ is a paper manufacturer. It owns 50,000 acres of forestland in...
  • Z-share
    For example, let's say John Doe works in the human resources department of the XYZ Fund...
  • Z
    On the Nasdaq market, for example, the letter Z after the ticker (an XYZ Company security...
  • Nanny Tax
    For example, let's say John and Jane Doe hire Sally Smith to take care of their two...