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Factors behind Low Long-Term Interest Rates

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Abstract

Long-term bond yields have been low in recent years both in nominal and real terms, and – especially in the United States – they have reacted differently to shifts in monetary and fiscal stances relative to previous cycles. This article examines various possible explanations for this behaviour, such as the effects of changes in monetary policy frameworks on inflation and interest rate expectations; developments in ex ante saving-investment balances, and shifts in investors’ portfolio preferences (including official reserve accumulation, “petro-dollar” recycling and pension fund demand for longer maturities). The article concludes that it is unlikely that any individual explanation can account for the level and profile of bond yields in recent years, but that an important element has been a compression in term premia, together with shifts in expected short rates. Even though bond yields have started to rise in the early part of 2006, they are unlikely to go back to the levels that prevailed in the 1980s or the early 1990s, as several of the factors that drove them lower are set to persist.

Suggested Citation

  • Oecd, 2006. "Factors behind Low Long-Term Interest Rates," Financial Market Trends, OECD Publishing, vol. 2006(2), pages 101-141.
    • Handle: RePEc:oec:dafkab:5l9gd5ndw0jk
    DOI: 10.1787/fmt-v2006-art12-en
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    Cited by:

    1. Karlis Vilerts & Olegs Tkacevs, 2016. "The Impact of Sovereign Bond Yields on Fiscal Discipline," Working Papers 2016/05, Latvijas Banka.
    2. Stefano Nobili & Gerardo Palazzo, 2008. "A beta based framework for (lower) bond risk premia," Temi di discussione (Economic working papers) 689, Bank of Italy, Economic Research and International Relations Area.
    3. repec:hal:spmain:info:hdl:2441/5221 is not listed on IDEAS
    4. Bruno Ducoudre, 2008. "Structure par terme des taux d’intérêt et anticipations de la politique économique," Sciences Po publications info:hdl:2441/5221, Sciences Po.
    5. Clerc, L., 2007. "Understanding Asset Prices: Determinants and Policy Implications," Working papers 168, Banque de France.

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