Why is the yield to maturity (YTM) of a long-term STRIP typically lower than that of a short-term STRIP?
STRIPS is the acronym for Separate Trading of Registered Interest and Principal of Securities.
In layman's terms, a brokerage house buys a bunch of treasuries, US government bonds, and separates the coupons (the interest payments) from the principal, the final payment. This transmogrifies these 30 year bonds into a series of zero coupon bonds.
Now, to your question. Yes, the demand is so high for long term zeros that the price gets bid up and the yield twisted lower than, say, the 25 year zeros.
No, the reason is all mathematics. Yield is the geometric mean return on the STRIP to maturity, not the arithmetic mean return. The linear relationship between risk and return, under capital market theory, is based on arithmetic mean return. Geometric mean return is arithmetic mean return minus half the square of the risk (volatility) so geometric mean return is a quadratic function of risk, not a linear function. Its graph, as a function of risk, is a parabola, not the line that the graph of arithmetic mean return is. The yield curve is also approximately a parabola, because the risk (volatility) of a STRIP investment is approximately proportional to its duration.