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Explaining the US Bond Yield Conundrum

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Author Info
Bandholz, Harm
Clostermann, Joerg
Seitz, Franz
Abstract

We analyze 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 behavior of bond yields, even during the last two years, can well be explained. Alongside the more traditional macroeconomic 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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2386.

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Date of creation: Feb 2007
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Handle: RePEc:pra:mprapa:2386

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Related research
Keywords: bond yields interest rates cointegration inflation forecasting

Find related papers by JEL classification:
E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates

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