In order to aid recovery from the financial crisis of 2007-2009: the US Government Issued a large number of US Treasury bonds to Hind the federal deficit The increase in supply of bonds suggests that long term interest rates should Increase due to the demand for private sector savings by the government At the same time the Federal Reserce set short term rates to be vay low. The term structure theory we studied in die first pan of le course suggest long term rates should be low: smce they are the average of sholt-term rates over time. As seen below (black line): the Interest rates on US bonds declined dramatically with the crisis and remamed relatively low. Explain the apparent contradiction m the two predictions and your understanding of ffe actual result 10-year government bond yields, per cent 15 13 11 9 7 US 15 13 11 9 7 5 1965 1970 1975 GER 1980 JAP 1995 SWE 2000 Finanqi.! Crisi 1985 1990 2005 2010 2015