Mildly Explosive Dynamics in U.S. Fixed Income Markets

We use a recently developed right-tail variation of the Augmented Dickey-Fuller unit root test to identify and date-stamp periods of mildly explosive behavior in the weekly time series of eight U.S. fixed income yield spreads between September 2002 and April 2018. We find statistically significant evidence of mildly explosive dynamics in six of these spreads, two of which are short/medium-term mortgage- related spreads. We show that the time intervals characterized by instability that we estimate from these yield spreads capture known episodes of financial and economic distress in the U.S. economy. Mild explosiveness migrates from short-term funding markets to medium- and long-term markets during the Great Financial Crisis of 2007-09. Furthermore, we statistically validate the conjecture, originally suggested by Gorton (2009a,b), that the initial panic of 2007 migrated from segments of the ABX market to other U.S. fixed income markets in the early phases of the financial crisis.