Term Structure Modeling with Supply Factors and the Federal Reserve's Large Scale Asset Purchase Programs

Abstract

This paper estimates an arbitrage-free term structure model with both observable yield factors and Treasury and Agency MBS supply factors, and uses it to evaluate the term premium effects of the Federal Reserve's large-scale asset purchase programs. Our estimates show that the first and the second large-scale asset purchase programs and the maturity extension program jointly reduced the 10-year Treasury yield by about 100 basis points.

Keywords: No-arbitrage term structure models, Yield curve, Preferred habitat, Supply effects, Factor models, large-scale asset purchases, Agency mortgage-backed securities (MBS)

JEL Classification: G1, E4, C5