RT Journal Article
SR Electronic
T1 Another View on U.S. Treasury Term Premiums
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP 5
OP 21
DO 10.3905/jfi.2015.24.4.005
VO 24
IS 4
A1 J. Benson Durham
YR 2015
UL https://pm-research.com/content/24/4/5.abstract
AB 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 negative at times, term premiums as opposed to low anticipated short rates. Depressed term premiums plausibly owe to unconventional Federal Reserve policy as well as net flight-to-quality flows during the period. 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 timeseries dynamics of common affine term structure model (ATSM) factors, 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.TOPICS: Fixed income and structured finance, legal/regulatory/public policy