Explaining the US Bond Yield Conundrum

Harm Bandholz, Joerg Clostermann and Franz Seitz

MPRA Paper from University Library of Munich, Germany

Abstract: We analyze if and to what extent fundamental macroeconomic factors, temporary influences or more structural factors have contributed to the low levels of US bond yields over the last few years. For that purpose, we start with a general model of interest rate determination. The empirical part consists of a cointegration analysis with an error correction mechanism. We are able to establish a stable long-run relationship and find that the behavior of bond yields, even during the last two years, can well be explained. Alongside the more traditional macroeconomic determinants like core inflation, monetary policy and the business cycle, we also include foreign holdings of US Treasuries. The latter should capture the frequently mentioned structural effects on long-term interest rates. Finally, our bond yield equation outperforms a random walk model in different forecasting exercises.

Keywords: bond yields; interest rates; cointegration; inflation; forecasting (search for similar items in EconPapers)
JEL-codes: E43 E47 (search for similar items in EconPapers)
Date: 2007-02
New Economics Papers: this item is included in nep-fmk, nep-for, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Explaining the US bond yield conundrum (2009)
Working Paper: Explaining the US bond yield conundrum (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:2386

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