Explaining the US Bond Yield Conundrum

Bandholz, Harm; Clostermann, Joerg and Seitz, Franz (2007): Explaining the US Bond Yield Conundrum. Unpublished.

Abstract

We analyze if and to what extent fundamental macroeconomic factors, temporary influences or more structural factors have contributed to the low levels of US bond yields over the last few years. For that purpose, we start with a general model of interest rate determination. The empirical part consists of a cointegration analysis with an error correction mechanism. We are able to establish a stable long-run relationship and find that the behavior of bond yields, even during the last two years, can well be explained. Alongside the more traditional macroeconomic determinants like core inflation, monetary policy and the business cycle, we also include foreign holdings of US Treasuries. The latter should capture the frequently mentioned structural effects on long-term interest rates. Finally, our bond yield equation outperforms a random walk model in different forecasting exercises.

• Item Type: MPRA Paper
• Language: English
• Keywords: bond yields; interest rates; cointegration; inflation; forecasting
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E47 - Forecasting and Simulation; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Determination of Interest Rates; Term Structure of Interest Rates

References

Bandholz, H., J. Clostermann and F. Seitz (2007), Explaining the US Bond Yield Conundrum, University of Applied Sciences Weiden Discussion Paper no. 2, February 2007