Final answer:
If a country's currency is expected to appreciate, expected exchange rates can cause yields on government bonds to decrease, as the demand for the currency increases, allowing the government to offer lower interest rates.
Step-by-step explanation:
According to the maturity preference theory, the forward rate is an estimate of future spot rates that includes a liquidity premium for longer-term investments. When discussing the impact on yields if a country's currency is expected to appreciate, one would expect foreign investment to increase as investors may seek to capitalize on the higher returns that result from the appreciation. Consequently, this can lead to a decrease in interest rates, as the increased demand for the country's currency could allow the government to offer their bonds at lower yields.
An appreciation in the currency tends to increase demand for assets denominated in that currency, as investors expect to gain not only from the asset's yield but also from the potential currency appreciation. If a country's currency is expected to appreciate, the expected exchange rates can lead to lower yields on government bonds, as investors are willing to accept a lower interest rate in exchange for the benefits of currency appreciation.