Which of the following cases would have a tendency of causing the yield curve to become negatively sloped?

Question

BlackTom AI · Accepted Answer

Selling short-term government securities in an open market operation tightens short-term money market conditions and tends to push short-term yields above long-term yields, causing the yield curve to become negatively sloped.

1) Relevant knowledge points and concepts
- Yield curve slope: difference between long-term and short-term interest rates; negative slope (inversion) means short-term rates > long-term rates.
- Open market operations: central bank sales of securities drain reserves and raise short-term interest rates; purchases inject reserves and lower short-term rates.
- Expectations theory: long-term yields reflect expected future short-term rates (plus liquidity/risk premiums). If future short rates are expected to rise, long-term yields tend to be higher than current short rates (positive slope).

2) Step-by-step reasoning
- When the central bank sells short-term government securities, private sector cash is exchanged for those securities and bank reserves fall.
- Lower reserves lead banks to seek funds in the short-term money markets, bidding up short-term rates (e.g., overnight, T-bill rates).
- Long-term yields (e.g., 10-year) are less directly affected by a small-term liquidity squeeze; they respond to longer-term inflation and growth expectations, not the immediate reserve effect.
- As short-term yields rise while long-term yields remain the same or move less, the curve can invert (short > long).

3) Calculations
- No numeric calculation is required; the logic is comparative: increase in short-term rate > change in long-term rate ⇒ negative slope.

4) Why the correct answer is correct
- A central bank sale of short-term securities directly increases short-term borrowing costs, making short rates rise relative to long rates; this is precisely the mechanism that creates or sharpens an inverted yield curve.

5) Why other options are incorrect
- Treasury purchase of short-term Treasuries: reduces short-term supply and lowers short rates, which would steepen (not invert) the curve.
- Market expectation of higher future short-term interest rates: raises long-term yields via expectations, producing an upward-sloping (positive) curve, not negative.
- “All of those”: cannot be true because the other two options move the slope in the opposite direction.

6) Conclusion
Therefore, the correct answer is: An open market operation that the central bank sells short-term government securities. This matches the provided answer.

Which of the following cases would have a tendency of causing the yield curve to become negatively sloped?单项选择题

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