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The contribution of US bond demand to the US bond yield conundrum of 2004–2007: An empirical investigation


  • Goda, Thomas
  • Lysandrou, Photis
  • Stewart, Chris


Although the federal funds rate started rising from mid-2004 US long term rates continued to fall. A likely contributory factor to this ‘conundrum’ was the contemporaneous increase in US bond demand. Using ARDL based models, which accommodate structural breaks, this paper estimates the impact of foreign and domestic demand on AAA rated US bond yields in the ‘conundrum’ period. This impact is shown to have been everywhere significantly negative. The fact that our model fully explains the ‘bond yield conundrum’ gives support to the hypothesis that the US CDO market was rapidly expanded before 2007 chiefly to absorb the overspill of global demand for safe assets. Moreover, our models demonstrate that there are strong linkages between the 10-year Treasury yield and the long term yields of AAA rated non-Treasury bonds.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:intfin:v:27:y:2013:i:c:p:113-136
    DOI: 10.1016/j.intfin.2013.07.012

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    References listed on IDEAS

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    Cited by:

    1. Homburg Stefan, 2016. "Pure Theory of the Federal Funds Rate," Review of Economics, De Gruyter, vol. 67(3), pages 285-296, December.
    2. Photis Lysandrou, 2014. "Post-Keynesian stock-flow models after the subprime crisis: the need for micro-foundations," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 11(1), pages 113-126, April.
    3. repec:bla:devchg:v:48:y:2017:i:4:p:663-691 is not listed on IDEAS
    4. Saar, Dan & Yagil, Yossi, 2015. "Forecasting growth and stock performance using government and corporate yield curves: Evidence from the European and Asian markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 37(C), pages 27-41.
    5. repec:oup:indcch:v:26:y:2017:i:1:p:1-20. is not listed on IDEAS

    More about this item


    ARDL modeling; Bond yield conundrum; Investor demand; Subprime crisis; Structural breaks;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects


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