I just had a question regarding investors/markets rationale behind the cause of the yield curve. Assuming that investors believe that rates will be lower in the future and are pessimistic about the economy what is the rationale behind buying longer term bonds and causing the yield curve to invert. Is it because they want to lock in thr higher coupon rates or are they buying convexity to minimize the impacts of what they think are going to be lower rates?
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If interest rates fall long-term bonds will benefit more (since they have higher duration).
If investors believe that interest rates will fall they will demand lower yields on long-term bonds (equivalently, their buying will push down long-term bond yields) which can cause the curve to invert.
See here for a more technical explanation, particularly point 5 - "Expectations of falling rates lead to a flatter curve, or even an inverted curve."
