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Impact of Shifts in Yield Curve on Bond Valuations

Changes in the supply of and demand for money occur for many different reasons causing the yield cur ve to shift. We will consider two possible cases:
Parallel shifts. Demand for fixed income investments at all maturities falls. This will push down the price of money and hence result in lower bond prices and higher yields. Investors will demand higher yields on new issues and prices for bonds already issued will fall until they offer the same yields as equivalent new issues. We will assume that yields fall by 100 bpts at all maturities. This is referred to as a parallel shift in the yield cur ve.
Non-parallel shifts. For our second case we will assume that supply of new money at the short end is restricted but that demand for bonds with longer maturities increases. This will push up returns demanded (reduce prices) for bonds at the shor t end and push up prices (lower yields) of bonds at the long end. This type of change in the shape of the yield curve is called a non-parallel shift. The following example is a tilted shift but non-parallel shifts can take many forms.
This par ticular example is characteristic of changes in yield cur ves that take place when inflationary expectations have risen, pushing up yields on long-term instruments and the central bank has then acted to tighten liquidity and push up the level of shor t-end rates. As liquidity tightens the economy star ts to slow, inflationar y fears recede and long-term required returns and hence bond yields fall.