Another View on U.S. Treasury Term Premiums

37 Pages Posted: 12 Jan 2014 Last revised: 12 Jun 2019

Date Written: December 1, 2013

Abstract

The consensus suggests that subdued nominal U.S. Treasury yields on balance since the onset of the global financial crisis primarily reflect exceptionally low, if not occasionally negative, term premiums as opposed to low anticipated short rates. Depressed term premiums plausibly owe to unconventional Federal Reserve policy as well as to net flight-to-quality flows after 2007. However, two strands of evidence raise questions about this story. First, a purely survey-based expected forward term premium measure, as opposed to an approximate spot estimate, has increased rather than decreased in recent years. Second, with respect to the time-series dynamics of factors underlying affine term structure models, simple econometrics of recent data produce not only a more persistent level of the term structure but also a depressed long-run mean, which in turn implies an implausibly low expected short rate path. Strong caveats aside, an implication for central bankers is that unconventional monetary policy measures may have worked in more conventional ways, and an inference for investors is that longer-dated yields embed meaningful compensation for bearing duration risk.

Keywords: treasury term premium, monetary policy

JEL Classification: E52, G10

Suggested Citation

Durham, J. Benson, Another View on U.S. Treasury Term Premiums (December 1, 2013). FRB of New York Staff Report No. 658. Available at SSRN: https://ssrn.com/abstract=2377405 or http://dx.doi.org/10.2139/ssrn.2377405

J. Benson Durham (Contact Author)

Cornerstone Macro LLC ( email )

1330 Sixth Avenue, 5th Floor
New York, NY 10019
United States

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