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Most people understand that the term “interest rates” is plural and acknowledge the difference between the rates on a savings account, overnight federal funds rate, and 10-year Treasury bonds. Of the many differences one can point to, such as risk, issuer, or denomination, among the most basic and most important factors for determining the interest rate is the maturity, or length, of the bond. In this case, a surprisingly small amount of economics can yield some valuable insights into the relationship between interest rates on bonds of various maturities, or what is more often called the term structure of interest rates.

Economics tells us that at the most basic level, interest rates are a price that borrowers pay investors for moving purchasing power from the present to the future. This price obviously has both real and nominal components—the future value of the money you invest will depend on how high inflation is in the meantime. The price also reflects aspects of risk. Because you’re uncertain exactly what you’ll need for retirement, you’re uncertain about how much consumption you should transfer into the future. Real variables, inflation, and