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Bond Market “Conundrum”: New Factors Explaining Long-term Interest Rates?

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Author Info
Marie Brière () (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussel and Credit Agricole Asset Management SGR, Paris.)
Ombretta Signori () (Credit Agricole Asset Management SGR, Paris.)
Kokou Topeglo () (Credit Agricole Asset Management SGR, Paris.)

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Abstract

Interest rates behaved highly atypically from 2004 to 2006. While the US central bank raised its policy rate at every meeting, long-term interest rates remained so remarkably stable that Fed Chairman A. Greenspan described their behaviour as a “conundrum.” Comparing long term rates to their theoretical level based on fundamental valuation model, we show that the anomaly was in average 40 bp. Various explanations have been put forward: investors’ changed attitude toward risk, and the rise in US Treasury purchases by different categories of buyers. We show that, if these variables could theoretically be responsible for bond risk premium decline, by incorporating them in a fundamental model of bond rates, they can explain less than half of the anomaly. Their recent changing influence could nevertheless justify their use for prospective analysis of bond rates.

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File URL: http://www.solvay.edu/EN/Research/Bernheim/documents/wp06024.pdf
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Publisher Info
Paper provided by Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) in its series Working Papers CEB with number 06-024.RS.

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Length: 31 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:sol:wpaper:06-024

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Related research
Keywords: interest rates; central banks; flows of funds; financial markets.;

Find related papers by JEL classification:
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions

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References listed on IDEAS
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