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The U.S. Treasury Term Premia in a Low Interest Rate Regime

Author

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  • Maksim Isakin
  • Phuong V Ngo

Abstract

This article aims to rationalize major shifts in yields and term premia for the U.S. Treasury securities since 1961. To this end, we build and estimate a Markov switching model that features a distinctive regime where short-term interest rates are at the effective lower bound (ELB). Our empirical results show that the conditional covariance between long-run consumption growth and target inflation became significantly more positive at the ELB, which is consistent with the economic theory. More importantly, this change led to nominal bonds being a better hedge against low economic growth, causing a downward shift in term premia and yields. In addition, we can generate yields that match the U.S. data.

Suggested Citation

  • Maksim Isakin & Phuong V Ngo, 2025. "The U.S. Treasury Term Premia in a Low Interest Rate Regime," Journal of Financial Econometrics, Oxford University Press, vol. 23(3), pages 1877-1905.
    • Handle: RePEc:oup:jfinec:v:23:y:2025:i:3:p:1877-1905.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbae030
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    More about this item

    Keywords

    Markov switching; term premia; yield curve; monetary policy; low interest rates; ELB; ZLB; conditional covariance;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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