The contribution of US bond demand to the US bond yield conundrum of 2004–2007: An empirical investigation

Thomas Goda, Photis Lysandrou and Chris Stewart

Journal of International Financial Markets, Institutions and Money, 2013, vol. 27, issue C, 113-136

Abstract: Although the federal funds rate started rising from mid-2004 US long term rates continued to fall. A likely contributory factor to this ‘conundrum’ was the contemporaneous increase in US bond demand. Using ARDL based models, which accommodate structural breaks, this paper estimates the impact of foreign and domestic demand on AAA rated US bond yields in the ‘conundrum’ period. This impact is shown to have been everywhere significantly negative. The fact that our model fully explains the ‘bond yield conundrum’ gives support to the hypothesis that the US CDO market was rapidly expanded before 2007 chiefly to absorb the overspill of global demand for safe assets. Moreover, our models demonstrate that there are strong linkages between the 10-year Treasury yield and the long term yields of AAA rated non-Treasury bonds.

Keywords: ARDL modeling; Bond yield conundrum; Investor demand; Subprime crisis; Structural breaks (search for similar items in EconPapers)
JEL-codes: C22 E43 G01 G12 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (27)

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Working Paper: The contribution of us bond demand to the us bond yield conundrum of 2004 to 2007: an empirical investigation (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:27:y:2013:i:c:p:113-136

DOI: 10.1016/j.intfin.2013.07.012

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