The U.S. Treasury Term Premia in a Low Interest Rate Regime

Maksim Isakin and Phuong V Ngo

Journal of Financial Econometrics, 2025, vol. 23, issue 3, 1877-1905

Abstract: This article aims to rationalize major shifts in yields and term premia for the U.S. Treasury securities since 1961. To this end, we build and estimate a Markov switching model that features a distinctive regime where short-term interest rates are at the effective lower bound (ELB). Our empirical results show that the conditional covariance between long-run consumption growth and target inflation became significantly more positive at the ELB, which is consistent with the economic theory. More importantly, this change led to nominal bonds being a better hedge against low economic growth, causing a downward shift in term premia and yields. In addition, we can generate yields that match the U.S. data.

Keywords: Markov switching; term premia; yield curve; monetary policy; low interest rates; ELB; ZLB; conditional covariance (search for similar items in EconPapers)
JEL-codes: C32 C34 E43 E52 (search for similar items in EconPapers)
Date: 2025
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