Understanding Drivers of Interest Rates

This chapter considers the thought process behind forming views on interest rates that can be implemented using the rate products. Instead of any particular maturity, this chapter considers the entire yield curve when trying to understand interest rate movements. By forming views on the yield curve, one considers both the level of rates and the shape of the curve as related concepts. Numerous factors can affect rates. These factors are constantly in a state of flux with different factors increasing or receding in importance as the economic winds shift. Beyond the factors mentioned in this chapter, new factors are sure to emerge over time to affect interest rates. With rate markets, it is important to know the major drivers on long and short time scales; it is just as important to be on the lookout for new factors that may arise from time to time.