Why Have Long-term Treasury Yields Fallen Since the 1980s? Expected Short Rates and Term Premiums in (Quasi-) Real Time

Michael Kiley

No 2024-054, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Treasury yields have fallen since the 1980s. Standard decompositions of Treasury yields into expected short-term interest rates and term premiums suggest term premiums account for much of the decline. In an alternative real-time decomposition, term premiums have fluctuated in a stable range, while long-run expected short-term interest rates have fallen. For example, a real-time decomposition of the 10-yr. Treasury yield shows term premiums essentially equal in late 2013 and 2023, while the long-run value of expected short-term interest rates is estimated to have fallen in a manner similar to the FOMC’s Summary of Economic Projections and estimates from research on long-run neutral interest rates. These results suggest standard decompositions may overstate the role of term premiums in fluctuations of the yield curve.

Keywords: Term structure model; Recursive and rolling least squares; Real-time data (search for similar items in EconPapers)
JEL-codes: E43 E44 E47 (search for similar items in EconPapers)
Pages: 24 p.
Date: 2024-07-12
New Economics Papers: this item is included in nep-his
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2024-54

DOI: 10.17016/FEDS.2024.054

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