Final answer:
The expectations theory implies that the market expects future short-term interest rates to increase, as indicated by the increasing yields on longer-term Treasury securities compared to shorter-term ones.
Step-by-step explanation:
If the expectations theory is correct and given that the current yields on Treasury securities are 8.3% for 3-year, 8.4% for 7-year, and 8.7% for 10-year bonds, the market expects that the average interest rates on one-year bonds that will be realized in the future will increase. This is because the expectations theory suggests that long-term interest rates reflect expected future short-term rates. If the market expected future short-term rates to stay the same or decrease, there would not be an upward trend in the longer-term bond yields.
For example, the yield on 7-year Treasury securities is slightly higher than the 3-year Treasury securities, and the 10-year Treasury bond (note) yield is higher than both, suggesting expectations for increasing interest rates in the future since investors require a higher yield to compensate for the anticipated rise in rates over the longer term. Investors in Treasury bonds are typically expecting to earn more than they would from bank accounts, and these bonds are considered to be very low risk, especially compared with corporate bonds which pay a higher interest rate to offset their higher risk of defaulting.