Preferred Habitat Hypothesis

An hypothesis about the term structure of interest rates (the relationship between interest rates and term to maturity) proceeding from the principle that groups of investors prefer to hold bonds within particular maturity ranges to hedge their liabilities or to comply with regulatory requirements. To the extent that the demand for bonds from one group of investors increases relative to the demand from other groups, yields within the maturity range where relative demand has risen will fall relative to the yields within the maturity range where there is slack in demand. Also called Segmented Market Hypothesis.

Glossary * P