Market segmentation theory

Borrowers and investors may prefer particular maturities because of liabilities, investment mandates or funding needs and may not readily substitute across them. Demand for long-dated assets from pension funds, for example, can affect long yields differently from short money-market rates. The theory offers a different emphasis from pure expectations, though real markets can reflect several influences at once. It does not imply there is never any arbitrage or substitution between maturities. Assess the investor and borrower behaviour underlying a proposed explanation of the curve.