Which term structure theory supports the upward-sloping yield curve due to expected future interest rate increases?

The Unbiased Expectations Theory supports the idea that the shape of the yield curve reflects the market's expectations of future interest rates. When the yield curve is upward-sloping, this typically indicates that investors expect interest rates to rise in the future. According to this theory, long-term interest rates are essentially the geometric average of current short-term rates and expected future short-term rates. Therefore, if investors anticipate that short-term rates will increase, they will require a higher yield on long-term bonds to compensate for that expectation, leading to an upward-sloping yield curve.

This concept is crucial in understanding bond markets and investor behavior. If investors forecast rising rates, they will adjust their portfolio decisions accordingly, affecting bond prices and yields. Hence, the upward-sloping characteristic of the yield curve can be interpreted through the lens of future interest rate expectations, aligning perfectly with the principles of the Unbiased Expectations Theory.