Bond Market “Conundrum”: New Factors Explaining Long-term Interest Rates?

Marie Brière (), Ombretta Signori and Kokou Topeglo ()
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Kokou Topeglo: Credit Agricole Asset Management SGR, Paris.

No 06-024.RS, Working Papers CEB from Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB)

Abstract: Interest rates behaved highly atypically from 2004 to 2006. While the US central bank raised its policy rate at every meeting, long-term interest rates remained so remarkably stable that Fed Chairman A. Greenspan described their behaviour as a “conundrum.” Comparing long term rates to their theoretical level based on fundamental valuation model, we show that the anomaly was in average 40 bp. Various explanations have been put forward: investors’ changed attitude toward risk, and the rise in US Treasury purchases by different categories of buyers. We show that, if these variables could theoretically be responsible for bond risk premium decline, by incorporating them in a fundamental model of bond rates, they can explain less than half of the anomaly. Their recent changing influence could nevertheless justify their use for prospective analysis of bond rates.

Keywords: interest rates; central banks; flows of funds; financial markets. (search for similar items in EconPapers)
JEL-codes: E37 E43 E58 G23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-mac
Date: 2006-12
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http://www.solvay.edu/EN/Research/Bernheim/documents/wp06024.pdf First version, 2006 (application/pdf)

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Persistent link: http://EconPapers.repec.org/RePEc:sol:wpaper:06-024

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