Market Segmentation Theory

In finance, market segmentation theory is the theory that short-term, medium-term, and long-term bonds have completely unrelated interest rates. In the same way that, if you have siblings who share the same DNA as you from the same parents, each of you should be treated differently, since y’all have very different personalities. Hopefully.

While it may seem intuitive at first glance that interest rates of all the types of bonds might be somehow interrelated, it makes more sense that they’re not...when you think of how different short-term and long-term investors act.

The short-term bond market is full of short-term investors (such as banks), which in aggregate have different interests and behaviors than long-term investors (such as insurance companies), who try to look the other way and just let their long-term bonds do their thang. While all bonds have yield curves, they’re all based on different players in different games.