What does Expectations Theory suggest regarding long-term bond interest rates?

Expectations Theory posits that the interest rates on long-term bonds are determined by the market's expectations for future short-term interest rates. According to this theory, long-term interest rates represent an average of the expected future short-term rates anticipated over the term of the bond. This means that if investors expect short-term rates to rise in the future, long-term rates will be higher than current short-term rates to reflect that anticipated increase. Conversely, if future short-term rates are expected to fall, long-term rates may be lower.

The essence of this theory lies in the concept that investors base their decisions on future expectations, leading long-term bond yields to track these anticipated future short-term rates. Therefore, the notion that long-term rates will equal the average of expected short-term rates aligns perfectly with the predictions outlined by Expectations Theory.