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Interest rate co-movements, global factors and the long end of the term spread

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  • Byrne, Joseph P.
  • Fazio, Giorgio
  • Fiess, Norbert

Abstract

The decoupling of US short and long interest rates has been a distinctive feature of the 2000s. We employ recent advances in panel econometrics to document this disconnect for industrial countries and link it to a global latent factor in long term rates. We investigate whether international forces, such as global inflation, global output, or the global savings glut may be behind this global latent factor. The savings glut is the most likely contender, suggesting that reserve accumulation and a search for yield from emerging markets has lowered long rates internationally, driving a wedge between domestic short and long rates.

Suggested Citation

  • Byrne, Joseph P. & Fazio, Giorgio & Fiess, Norbert, 2012. "Interest rate co-movements, global factors and the long end of the term spread," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 183-192.
  • Handle: RePEc:eee:jbfina:v:36:y:2012:i:1:p:183-192
    DOI: 10.1016/j.jbankfin.2011.07.002
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    Cited by:

    1. ITO Hiroyuki & Phuong TRAN, 2019. "Managing the Yield Curve in a Financially Globalized World," Discussion papers 19012, Research Institute of Economy, Trade and Industry (RIETI).
    2. Guerello, Chiara & Tronzano, Marco, 2020. "“Global factors, international spillovers, and the term structure of interest rates: New evidence for Asian Countries”," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    3. Alex Ilek & Irit Rozenshtrom, 2017. "The Term Premium in a Small Open Economy: A Micro-Founded Approach," Bank of Israel Working Papers 2017.06, Bank of Israel.
    4. Contessi, Silvio & De Pace, Pierangelo & Guidolin, Massimo, 2014. "How did the financial crisis alter the correlations of U.S. yield spreads?," Journal of Empirical Finance, Elsevier, vol. 28(C), pages 362-385.
    5. Joseph P. Byrne & Norbert Fiess, 2011. "International capital flows to emerging and developing countries: national and global determinants," Working Papers 2011_01, Business School - Economics, University of Glasgow.
    6. Byrne, Joseph P. & Fiess, Norbert, 2016. "International capital flows to emerging markets: National and global determinants," Journal of International Money and Finance, Elsevier, vol. 61(C), pages 82-100.
    7. Byrne, Joseph P. & Cao, Shuo & Korobilis, Dimitris, 2019. "Decomposing global yield curve co-movement," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 500-513.
    8. Joseph P. Byrne & Shuo Cao & Dimitris Korobilis, 2015. "Co-Movement, Spillovers and Excess Returns in Global Bond Markets?," Working Papers 2015_12, Business School - Economics, University of Glasgow.
    9. Kučera, Adam, 2020. "Identification of triggers of U.S. yield curve movements," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    10. Sonali Jain-Chandra & Filiz D Unsal, 2012. "The Effectiveness of Monetary Policy Transmission Under Capital Inflows; Evidence from Asia," IMF Working Papers 2012/265, International Monetary Fund.
    11. Diego Valiante, 2017. "The ‘Visible Hand’ of the ECB’s first quantitative easing," International Economics and Economic Policy, Springer, vol. 14(4), pages 601-624, October.
    12. Byrne, Joseph P. & Fazio, Giorgio & Fiess, Norbert, 2013. "Primary commodity prices: Co-movements, common factors and fundamentals," Journal of Development Economics, Elsevier, vol. 101(C), pages 16-26.
    13. Sowmya, Subramaniam & Prasanna, Krishna & Bhaduri, Saumitra, 2016. "Linkages in the term structure of interest rates across sovereign bond markets," Emerging Markets Review, Elsevier, vol. 27(C), pages 118-139.
    14. Juneja, Januj A., 2016. "Financial crises and estimation bias in international bond markets," Research in International Business and Finance, Elsevier, vol. 38(C), pages 593-607.
    15. Lange, Ronald H., 2014. "The small open macroeconomy and the yield curve: A state-space representation," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 1-21.
    16. Lange, Ronald H., 2017. "The expected real yield and inflation components of the nominal yield curve," The North American Journal of Economics and Finance, Elsevier, vol. 39(C), pages 1-18.
    17. Kiryoung LEE & Chanik JO, 2018. "Forecasting Chinese Business Cycle Using Long-term Interest Rate Comovements," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 118-134, December.
    18. Ilek, Alex & Rozenshtrom, Irit, 2018. "The term premium in a small open economy: A micro-founded approach," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 333-352.
    19. Lange, Ronald H., 2015. "International long-term yields and monetary policy in a small open economy: The case of Canada," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 292-310.

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    More about this item

    Keywords

    Short interest rates; Long interest rates; Financial globalization; Panel data; Factor models;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F01 - International Economics - - General - - - Global Outlook
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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