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Explaining the US bond yield conundrum

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  • Harm Bandholz
  • Jorg Clostermann
  • Franz Seitz

Abstract

We analyse if and to what extent fundamental macroeconomic factors, temporary influences or more structural factors have contributed to the low levels of US bond yields over the last few years. For that purpose, we start with a general model of interest rate determination. The empirical part consists of a cointegration analysis with an error-correction mechanism. We are able to establish a stable long-run relationship and find that the behaviour of bond yields, even during the last years, can be well explained by macroeconomic and structural factors. Alongside the more traditional determinants like core inflation, monetary policy and the business cycle, we also include foreign holdings of US Treasuries. The latter should capture the frequently mentioned structural effects on long-term interest rates. Finally, our bond yield equation outperforms a random walk model in different forecasting exercises.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 19 (2009)
Issue (Month): 7 ()
Pages: 539-550

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Handle: RePEc:taf:apfiec:v:19:y:2009:i:7:p:539-550

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Citations

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Cited by:
  1. Thomas Goda & Photis Lysandrou & Chris Stewart, 2011. "The contribution of us bond demand to the us bond yield conundrum of 2004 to 2007: an empirical investigation," DOCUMENTOS DE TRABAJO CIEF 010719, UNIVERSIDAD EAFIT.
  2. Luis Eduardo Arango & Wilmar Cabrera & Esteban Gómez & Juan Carlos Mendoza, 2013. "Tasa de interés de largo plazo, interés técnico y pasivo pensional," Borradores de Economia 796, Banco de la Republica de Colombia.
  3. Phillip Daves & Michael Ehrhardt, 2011. "Creating a synthetic after-tax zero-coupon bond using US Treasury STRIP bonds: implications for the true after-tax spot rate," Applied Financial Economics, Taylor & Francis Journals, vol. 21(10), pages 695-705.
  4. Schalast, Christoph & Tiemann, Marcel & Tuppi, Pascal, 2009. "Staatsfonds - neue Akteure an den Finanzmärkten?," Frankfurt School - Working Paper Series 114, Frankfurt School of Finance and Management.
  5. Goda, Thomas & Lysandrou, Photis & Stewart, Chris, 2013. "The contribution of US bond demand to the US bond yield conundrum of 2004–2007: An empirical investigation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 113-136.
  6. Guglielmo Maria Caporale & Alessandro Girardi, 2011. "Fiscal Spillovers in the Euro Area," Discussion Papers of DIW Berlin 1164, DIW Berlin, German Institute for Economic Research.
  7. Arvind Subramanian, 2011. "Renminbi Rules: The Conditional Imminence of the Reserve Currency Transition," Working Paper Series WP11-14, Peterson Institute for International Economics.
  8. Thomas Goda & Photis Lysandrou, 2011. "The contribution of wealth concentration to the subprime crisis: a quantitative estimation," DOCUMENTOS DE TRABAJO CIEF 010718, UNIVERSIDAD EAFIT.
  9. Luis Eduardo Arango & Wilmar Cabrera & Esteban Gómez & Juan Carlos Mendoza, 2013. "Tasa de interés de largo plazo, interés técnico y pasivo pensional," BORRADORES DE ECONOMIA 011101, BANCO DE LA REPÚBLICA.

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