The core idea
Banks match short-term deposits with short bonds, while insurers and pension funds want long bonds to match distant payouts. If investors stick to their maturities, more long-bond supply raises only long-term yields. Among term structure theories, it stands out for emphasizing supply-side forces.
Limits and refinements
It can't explain why yields across maturities usually move together. Modigliani and Sutch's preferred habitat theory fixes this: investors prefer certain maturities but will move for a big enough premium. Still, the Fed's quantitative easing, buying long bonds to push down long rates, reflects segmentation-style thinking about the yield curve.
FAQ
- Why would the curve slope up under this theory?
- Because demand for short bonds is relatively stronger than for long bonds.
- Main difference from expectations theory?
- Expectations theory assumes maturities are perfect substitutes; segmentation assumes they aren't.
Sources reviewed: 2026-10-26
References
- Culbertson, J. M. (1957). The term structure of interest rates. Quarterly Journal of Economics, 71(4), 485–517.
- Modigliani, F., & Sutch, R. (1966). Innovations in interest rate policy. American Economic Review, 56(1/2), 178–197.
- Mishkin, F. S. (2019). The Economics of Money, Banking, and Financial Markets (12th ed.). Pearson.