While there are several theories that explain the shape of the yield curve, such as expectations about future interest rates, liquidity preferences, or investor preferences for specific maturities. In practice, however, yield curves are also influenced by a range of market factors. Let's take a look at a few examples that can help explain changes in the yield curve beyond the theories. First market expectations, whether about future interest rates or inflation, can have a direct impact on demand and supply for bonds with different maturities. When expectations shift, some maturities might see higher demand, while others could face increased selling pressure. Second, there's the supply of bonds. For example, if a government reduces its issuance of long-term bonds, investors needing those bonds for liability management may rush to buy them driving up prices and pushing yields down. Demand side factors also play a part when the overall demand for bonds increases. While the available supply remains stable, rising bond prices can lead to shifts in the shape of the yield curve.

Additionally, central bank policies are another crucial factor. For example, when central banks engage in quantitative easing by purchasing long-term bonds, they directly lower yields on those bonds, which can flatten the curve. And finally, economic growth and global events also impact the curve. If investors expect strong growth or conversely fear a recession, they may adjust their bond portfolios accordingly, which can steepen or invert the yield curve. Likewise, international investors and global market conditions can influence domestic bond yields, especially in times of uncertainty.