Interest rate uncertainty and the shape of the yield curve of U.S. treasury bonds

Yasmeen Bayaa and Mahmoud Qadan ()
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Yasmeen Bayaa: University of Haifa
Mahmoud Qadan: University of Haifa

Eurasian Economic Review, 2024, vol. 14, issue 4, No 6, 1003 pages

Abstract: Abstract We decompose the yield curve of U.S. Treasury bonds into three components—the level, slope, and curvature. We then explore the interaction between these factors and uncertainty in the U.S. bond market. We assess this uncertainty using a VIX-style estimate originating in options on the CBOE’s Treasury Note futures. Using monthly data for 2003–2020, we find that interest rate uncertainty drives the evolution in the shape of the yield curve, but not vice versa. Specifically, the bond market’s VIX-style metric not only correlates with but also influences the yield curve’s level and slope. Moreover, increased uncertainty about interest rates is negatively associated with, and can significantly influence, the yield curve’s curvature. The results of this study are crucial for both policymakers and money managers.

Keywords: Interest rate uncertainty; Monetary surprises; Monetary shocks; Uncertainty; Term structure (search for similar items in EconPapers)
JEL-codes: C53 E43 E47 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s40822-024-00278-8

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