Economic Uncertainty, Precautionary Savings, and Treasury Yield Dynamics

Abstract

We show there is a much stronger negative dynamic relation between changes in economic uncertainty and Treasury yields over weaker-economic times since at least 1990. We document this economic-state variation in uncertainty-yield dynamics for weekly and monthly change horizons, for nominal yields and real-yield proxies, for multiple economic-state identification methods, and for different economic-uncertainty metrics. We provide additional evidence to probe interpretation, especially relying on survey-based expected economic growth and inflation. Our collective evidence suggests that short-term fluctuations in precautionary-savings and consumption-smoothing forces are particularly influential on interest rate dynamics during weaker-economic times.