Fixed Income - Yield Curve Question

CFA Level I Fixed Income
#1

Hey everyone! First time posting here and I need some help with a QBank question:

QBank: Generally speaking, an upward-sloping yield curve can be expected when:

Answer: the supply of long-term funds falls short of demand and investors begin to show a preference for more liquid/less risky short-term securities.

As I understand it, more preference for more liquid/less risky short-term securities can be expected to drive up long-term rates as the liquidity premium rises.

But what I don’t understand is, if demand for long-term funds is greater than supply, doesn’t that mean the price of those long term bonds will rise, causing yields to go down, thus resulting in a downward-sloping yield curve?

#2

Funds aren’t bonds. Draw a normal supply/demand market. Now draw it again identically and switch the labels. The demand for funds is the supply of bonds, and the demand for bonds is the supply of funds. If there is excess demand for funds, yields are bid up and the corresponding price falls. It’s almost always easier to consider the money market instead of the bond market because the bond market is basically derived. No one is out on the street shouting that they want to buy bonds, but plenty of people are looking to borrow or lend money.

#3

Ahhhh this is perfect. That is a much easier way to look at it. Thanks a bunch!