The Bond Yield 'Conundrum' from a Macro-Finance Perspective

FRB of San Francisco Working Paper No. 2006-16

42 Pages Posted: 26 Jul 2007

See all articles by Glenn D. Rudebusch

Glenn D. Rudebusch

Federal Reserve Bank of San Francisco

Eric T. Swanson

University of California, Irvine - Department of Economics

Tao Wu

Federal Reserve Bank of Dallas; Federal Reserve Bank of San Francisco

Date Written: May 2006

Abstract

In 2004 and 2005, long-term interest rates remained remarkably low despite improving economic conditions and rising short-term interest rates, a situation that former Fed Chairman Alan Greenspan dubbed a conundrum. We document the extent and timing of this conundrum using two empirical no-arbitrage macro-finance models of the term structure of interest rates. These models confirm that the recent behavior of long-term yields has been unusual - that is, it cannot be explained within the framework of the models. Therefore, we consider other macroeconomic factors omitted from the models and find that some of these variables, particularly declines in long-term bond volatility, may explain a portion of the conundrum. Foreign official purchases of U.S Treasuries appear to have played little or no role.

Keywords: Treasury bonds, Federal funds rate

Suggested Citation

Rudebusch, Glenn D. and Swanson, Eric T. and Wu, Tao, The Bond Yield 'Conundrum' from a Macro-Finance Perspective (May 2006). FRB of San Francisco Working Paper No. 2006-16, Available at SSRN: https://ssrn.com/abstract=1003033 or http://dx.doi.org/10.2139/ssrn.1003033

Glenn D. Rudebusch (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Eric T. Swanson

University of California, Irvine - Department of Economics ( email )

University of California, Irvine
3151 Social Science Plaza
Irvine, CA 92697-5100
United States
(949) 824-8305 (Phone)

HOME PAGE: http://www.ericswanson.org

Tao Wu

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
330
Abstract Views
1,691
rank
111,971
PlumX Metrics