Macroeconomic shocks and the term premium in the US

This paper analyzes the macroeconomic drivers of the US ten-year term premium using a daily Structural Vector Autoregressive model with sign and narrative restrictions, a framework that has not been previously applied in this context. Domestic uncertainty, inflation compensation, and domestic demand shocks explain most of the daily variation in the term premium. Domestic uncertainty, in particular, plays a central role, as it is the only shock that explains the strong negative co-movement between the expected short-term rate and the term premium, a stylized fact that has so far gone unnoticed in the literature. We use the model to revisit the behaviour of the term premium since the onset of the Great Financial Crisis, with a focus on more recent events where changes in the term premium have been at the centre of policy debate. Our results shed light on the quantitative relevance of specific channels and challenge existing narratives about these episodes.