Do Treasury Term Premia Rise around Monetary Tightenings?

Tobias Adrian, Richard Crump and Emanuel Moench

No 20130415, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Some commentators have expressed concern that Treasury yields might rise sharply once the Federal Open Market Committee (FOMC) begins to raise the federal funds rate (FFR), worrying, in particular, about a sudden increase in Treasury term premia. In this post, we analyze the dynamics of Treasury term premia over the last fifty years and discuss their evolution around recent tightening cycles, paying special attention to the 1994 episode when bond prices dropped sharply around the world. We find that term premia don’t typically rise when monetary policy tightens. We also conclude, based on the behavior of term premia and survey evidence, that the sharp rise in Treasury yields in 1994 was in large part due to an upward shift in the expected path of future short-term interest rates.

Keywords: tightening cycles; Term premia; monetary policy (search for similar items in EconPapers)
JEL-codes: E2 G1 (search for similar items in EconPapers)
Date: 2013-04-15
New Economics Papers: this item is included in nep-mac and nep-mon
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