A humped yield curve is a phenomenon that occurs in the bond market in which medium-term interest rates are higher than both short- and long-term rates. This is unusual because typically the yield curve is negative (-) or inverse (-) meaning that generally long-term interest rates are higher than short-term interest rates.

The humped yield curve is caused mainly by fluctuations in monetary policy, as interest rates can rise or fall over time depending on the economic climate. When economic conditions are stagnant or in recession, the Federal Reserve often lowers its federal funds rate in an attempt to stimulate the economy and prevent a recession. This lowers short-term yields and causes the yield curve to flatten.

In addition, the humped yield curve is often a reflection of investor sentiment in the market. When investor sentiment is pessimistic and they are expecting further declines in interest rates in the future, they will buy more long-term bonds and therefore the yield curve will be humped. This humped curve reflects investor expectations of lower rates in the future.

On the other hand, when investor sentiment is more optimistic, they may be expecting rate hikes in the near future and will therefore buy shorter-term bonds in order to capitalize on these expected fluctuations. This activity may cause a negatively sloping yield curve, which could also produce a humped yield curve.

Finally, the humped yield curve may also be caused by economic factors, such as changes in commodity prices and consumer spending. If consumers are saving more and consequently spending less, this could cause investors to have a pessimistic outlook and buy longer-term bonds in anticipation of further decreases in interest rates.

Overall, a humped yield curve is an unusual occurrence and is most often caused by fluctuations in monetary policy, changes in investor sentiment, and economic indicators such as commodity prices and consumer spending.