US Treasury Yield Research Articles

Fed Tapering: How Has Feds Announcement of Tapering Affected Consumers and Foreign Economy?

This articles purpose is to investigate the Federal Reserves tapering decision and how it affects consumers behavior and the foreign economy. To generate a prediction of how tapering changes consumers behavior, we recorded the dates that FOMC has made announcements and used them to create a regression analysis with the US treasury yield. To make sure our statistical inference is reliable, we analyzed different types of treasury bonds, which include 1 year, 3 years, 5 years, 10 years, and 30 years. We also utilized the real-interest rate and Chinese Yuan to US dollar exchange rate to analyze the correlation between interest rate and exchange. The purpose is to give a rough understanding of how tapering could affect foreign economy. When we are concluding the analyzed result, a counterintuitive finding appears. When the Fed announces a tapering or tightening decision, we should expect an increase in the interest rate. However, the interest rate decreases whenever the Fed decides to taper. On the other hand, as the interest rate falls, we should expect a depreciation of the dollar and a decrease in the price of Americas goods and services. It shouldve benefited foreign economies, but instead, it worsens them and causes their currencies to further depreciate. Altogether, the results suggested that the Feds tapering decision will change consumers behavior and unavoidably decline other countries' economies.

Study of Factors Influencing U.S. Treasury Yields Based on Time Series Linear Regression Models

Studying the impact of changes in the savings rate on fluctuations in US Treasuries is significant. This paper conducts a linear regression analysis of the yield of US Treasuries, inflation rate, GDP growth rate, and US savings rate over the past decade, aiming to explore their relationships and influences. Based on economic data from the United States, a model is constructed, which is further applied to data from the European Union to validate its applicability and accuracy across different economic systems and to investigate the impact of disparities in data between different regions on the results. After analyzing the data and obtaining results, various types of economic data from the European Union are used as model variables for testing. Following a correlation analysis of the data, the conclusion is drawn that even different regions or countries exhibit varying positive or negative correlations between their economic data and US Treasury yield fluctuations. This paper delves into the analysis and comparison of the interaction between US Treasury yields and economic indicators of both the United States and the European Union, exploring whether these interactions manifest differently in the two distinct economic systems.

Multifactorial Heath-Jarrow-Morton model using principal component analysis

In this study, we propose an implementation of the multifactor Heath-Jarrow-Morton (HJM) interest rate model using an approach that integrates principal component analysis (PCA) and Monte Carlo simulation (MCS) techniques. By integrating PCA and MCS with the multifactor HJM model, we successfully capture the principal factors driving the evolution of short-term interest rates in the US market. Additionally, we provide a framework for deriving spot interest rates through parameter calibration and forward rate estimation. For this, we use daily data from the US yield curve from June 2017 to December 2019. The integration of PCA, MCS with multifactor HJM model in this study represents a robust and precise approach to characterizing interest rate dynamics and compared to previous approaches, this method provided greater accuracy and improved understanding of the factors influencing US Treasury Yield interest rates.

Forecasting the Risk-Free Rates: Practical Forecasting Model for the Future of 10-Year US Treasury Yield through Exogenous Variables

Forecasting the Risk-Free Rates: Practical Forecasting Model for the Future of 10-Year US Treasury Yield through Exogenous Variables

Quantile-on-quantile connectedness measures: Evidence from the US treasury yield curve

This study introduces a novel quantile-on-quantile connectedness approach to explore reversely related and directly related quantile spillovers. To illustrate the benefits of the proposed method, we examine the spillovers across the 2-year US Treasury yield (US2Y) and the yield curve spread between the 10-year and 2-year US Treasury yield (US2Y10Y) from 13 July 1998 to 11 July 2023. The empirical results show that the average total connectedness between reversely related quantiles is substantially higher than directly related quantiles. Additionally, the average quantile-based total connectedness is heterogeneous over time and economic events dependent.

The term structure of yield curve and connectedness among ESG investments

We examine the connectedness of different components of the US treasury’s term structure with ESG (Environment, Social, and Governance) leader indices regarding return and volatility. The EMU (Economic and Monetary Union) and the UK lie at the center of the network. The connectedness is time-varying and versatile regarding return- and volatility spillovers and various components of the US treasury yield curve. The long-term rates influence returns, whereas the short- and medium-term are dominant regarding volatility spillovers. Interestingly, both return- and volatility spillovers from the yield curve components change behaviors/directions during the GFC and COVID-19. Importantly, long-term interest rates are significant shock transmitters during times of stress. Our findings have implications for ESG investors, who should keep in mind the shape of the yield curve while making portfolio choices and investment-horizon decisions.

Spillover and connectedness among G7 real estate investment trusts: The effects of investor sentiment and global factors

This paper examines the dynamic spillover interconnectedness of G7 Real Estate Investment Trusts (REITs) markets. We use the spillover index of Diebold and Yilmaz (2012), the time-varying parameters vector-autoregression (TVP-VAR) model, and the quantile regression approach. The result show that REITs network connectedness is dynamic and experiences an abrupt increase in the first wave of COVID-19 outbreak (2020Q1). We also observe a substantial abrupt decrease in connectedness during the success of vaccination programs (end 2021). The connectedness among assets is much stronger during COVID-19 than before. The REITs of Japan and Italy are net receivers of spillover and those of US and UK are net transmitters of spillovers before and during COVID-19. Conversely, the REIT of Canada and Germany (France) switches from net receivers (contributors) of spillovers before the pandemic to net contributors (receivers) during the COVID-19. Finally, we show that News Sentiment index, Geopolitical Risk index, Economic Policy Uncertainty index, US Treasury yield, and Stock Volatility index influence the spillover magnitude across quantiles.

Analisis Pengaruh Opini Audit BPK terhadap Tingkat Imbal Hasil (Yield) Surat Berharga Negara

This paper analyzes the effect of BPK's audit opinion on SBN Yield, with two approaches: Financial market reaction with Signaling Theory and Multiple Linear Regression. Based on the first approaches, the analysis shows that SBN Yield is influenced by the level of LKPP audit opinion. It shows that there is a "Before and After" correlation of reactions to the announcement of the Unqualified audit opinion, on the other hand, there is no significant difference on Qualified and Disclaimer audit opinions. The second approach using Multiple Linear Regression shows that audit opinions have a negative correlation and significant effects on SBN Yield, in addition to Inflation, Exchange Rates, and US Treasury Yield. A good level of audit opinion will affect the level of confidence of both domestic and foreign investors in buying government bonds and will likely reduce SBN Yield.

DETERMINING FACTORS FOR 10-YEAR LOCAL CURRENCY SOVEREIGN BONDS YIELD WITH DYNAMIC REGRESSION MODEL

Sovereign bonds, particularly Local Currency Bonds (LCB) of 10-year tenure, had a strategic role in economy, thus understanding factors affecting its yield’s movement would help government to maintain economic stability.
 This paper empirically study Indonesia’s 10-year LCB and its relationship with several factors; US Treasury (UST) yield, credit default swap (CDS), foreign ownership, central bank's policy rate (policy rate), exchange rate, volatility index (VIX) and primary dealers' trading behavior. The relationship was modelled using Dynamic Regression Model (DRM), with ARIMA errors to absorb the dynamics. Evaluation on the model's performance was conducted by making prediction on the real LCB yield’s movement during 2021.
 The best model containing 10y-UST yield and its lag-1, 5y-CDS and its lag-1, exchange rate, policy rate and ARIMA errors of AR(1) and AR(2) could perform well in predicting the real yield. This study confirmed that 10y-UST and its lag-1 are the main drivers for the LCB yield’s movement, along with compelling influence of the exchange rate.

Emerging Markets Currency Factors and US High-Frequency Macroeconomic Shocks

Relying on the structural vector autoregression developed by Cieslak and Pang, the authors identify four shocks to the US economy based on the US Treasury yield curve and the stock market: two fundamental news shocks (growth and money) and two risk-premium shocks (common and hedging). They find that these shocks explain over 40% of the time-series variation of emerging markets currency (EMFX) returns. Additionally, EMFX returns increase significantly with positive growth shocks and decrease with monetary tightening and risk-premium shocks. The authors show that growth and common shocks are priced in the cross section of EMFX, with a positive and negative risk premiums, respectively. They then build long–short currency portfolios based on several academically researched style factors and test their performance and relative exposure to the macroeconomic shocks affecting the US economy. They find that only carry and macro momentum long–short portfolios generate positive and significant alphas and excess returns over their sample. However, all single-factor portfolios have sizable exposure to the four shocks. The authors show that a simple multifactor approach to investing in EMFXs eliminates the exposure of excess returns to all macroeconomic shocks.

Nexus Between Indian Financial Markets and Macro-economic Shocks: A VAR Approach

This paper studies the nexus between asset returns volatility in six major segments of Indian financial markets (viz. money, equity, gsec, forex, equity and banking stocks) and macro-economic shocks (viz. GDP, Inflation, Current Account Deficit, market capitalisation to GDP ratio, US Treasury Yield and Foreign Portfolio Investment). The period of study is from April 2002 to March 2021, a period covering four instances of significant economic and financial market stress. Findings of the study are generally aligned to economic theory, except for the case of gsec market. Besides, macro-variables were found to be exerting greater impact when they are in their weaker/unstable state and the behaviour of US treasury yield and FPI flows were found be more significant factors during stress periods and recovery immediately thereafter. Therefore, there is a need to focus on maintaining macroeconomic stability as a policy to foster financial market stability. Besides, there is a need to monitor a customized and dynamic list of macroeconomic variables in respect of each of the financial market segments to decide on the timing, type and quantum of policy and regulatory responses from time to time. This study contributed towards financial markets public policy, particularly during periods of uncertainties.

The GDP, the US treasury yield and the federal funds rate: who follows whom, when and why?

PurposeThis study aims to address the fundamental question on how the major players in the economy dynamically interact with each other: among the central bank, the investors in the bond market and the firms and consumers that contribute to the economic growth, who gets information from whom, when and why?Design/methodology/approachTo answer “who follows whom,” the authors apply a novel technique to examine the lead–lag relations between three time series, the federal funds rate, the treasury yield curve and the gross domestic product (GDP). To investigate “when and why,” the authors combine the lead–lag relations with principal component analysis to cluster economic states that are similar with respect to the eight macroeconomic variables.FindingsThe authors show that during the period 1977–2019, the bond market potentially obtained information from the federal funds rate (61% of the time) and less often (34% of time) from the changes in the GDP. Meanwhile, the funds rate decision by the Federal Reserve seems to lead the economic growth about 63% of the time. The analysis also suggests that the bond market obtained information directly from GDP when unemployment and inflation was high. In addition, the authors find that the federal funds rate was leading the GDP when the GDP deviated from the target value, consistent with the Federal Reserve’s policy of boosting and damping the economy when the GDP growth is low or high, respectively.Originality/valueThis study provides insights into the fundamental questions that have important implications for empirical work on the monetary policy, financial stability and economic activities.

Asymptotics for empirical eigenvalue processes in high-dimensional linear factor models

When vector-valued observations are of high dimension N relative to the sample size T, it is common to employ a linear factor model in order to estimate the underlying covariance structure or to further understand the relationship between coordinates. Asymptotic analyses of such models often consider the case in which both N andT tend jointly to infinity. Within this framework, we derive weak convergence results for processes of partial sample estimates of the largest eigenvalues of the sample covariance matrix. It is shown that if the effect of the factors is sufficiently strong, then the processes associated with the largest eigenvalues have Gaussian limits under general conditions on the divergence rates of N andT, and the underlying observations. If the common factors are “weak”, then N must grow much more slowly in relation to T in order for the largest eigenvalue processes to have a Gaussian limit. We apply these results to develop general tests for structural stability of linear factor models that are based on measuring the fluctuations in the largest eigenvalues throughout the sample, which we investigate further by means of a Monte Carlo simulation study and an application to US treasury yield curve data.

Do Investors Still Gravitate to Preferred Habitats on the US Treasury Yield Curve?

The purpose of this study is to test the preferred habitat theory non-econometrically using interviews with the help of a questionnaire for self-guidance on a group of focused investors. Frequencies and simple percentages were used to analyze data. Though many generations of post-World War II economics and finance students were taught that the nature of the liabilities on the balance sheet and the desire to avoid mismatches against assets caused particular classes of investors to gravitate to a preferred habitat on the yield curve, our study based on the responses to questionnaires by a group of U.S. based bond traders and risk analysts shows that more than half of the respondents have no preference as to where on the curve they trade, whether the trade is on behalf of their customers or for the house, and that their arbitrage strategies are driven by opportunities for profit.

AN ANALYSIS OF THE IMPACT OF EXTERNAL FINANCIAL RISKS ON THE SOVEREIGN RISK PREMIUM OF LATIN AMERICAN ECONOMIES

This article presents a quantification of the response of the sovereign risk premium (EMBI) of a group of Latin American countries, to unexpected changes (shocks) in external financial variables. The main contribution of the paper is to use the estimated parameters of a vector autoregression (VAR) model using a special Cholesky variance-covariance decomposition as a tool for risk scenario’s assessment. The proposed interpretation of the estimated matrix allows for the quantification of the impact of more than one shock and also to quantify spillovers. A VAR is estimated for each country (Colombia, Chile, Mexico, and Peru) in monthly frequency that includes China’s and Brazil’s EMBI, the global volatility index (VIX), plus the value of the dollar against a basket of currencies (Broad Index) and a proxy of the slope of the US Treasury yield curve (Spread US). The VIX and Broad Index shocks turn out to have a relatively homogenous effect on each country’s EMBI, while shocks to the China and Brazil EMBI are more heterogeneous. For the case of Chile, we further study three alternative risk scenarios, incorporating the copper price as an additional variable. The most disruptive scenario at the time when the shock hits is the “Volatility driven” one. Nevertheless, it is the “Emerging markets” scenario (namely one with simultaneous shocks to China’ and Brazil’s EMBI) the one with the most harmful dynamics, as it dyes out slower. Finally, a “Copper price bust” scenario, in which the price of copper drops significantly in addition to a shock to the EMBI China, is the one with the least effect as the price of copper is relatively less affected by shocks to other variables, displaying lower spillovers.

Dynamic Interactions between Government Bonds and Exchange Rate Expectations in Currency Options

This paper examines the dynamic interactions between the government bond yields of Germany, Japan and the US and their exchange rate expectations anticipated in the currency options, i.e., risk reversals (put premia) of the US dollar versus the yen and euro. Short-term, one-way information flow from the government bond market to the currency option market was substantial before the introduction of quantitative easing by the US Fed in response to the 2008 global financial crisis; this pattern diminished after the 2013 taper tantrum. The long-term bond yields are important and separable determinants of the risk reversals. The negative relationship between the spreads of the US Treasury yield over the other two countries’ bond yields, and the dollar risk reversals indicating a fall in US dollar interest rate, implies dollar depreciation expectations embedded in currency option prices, not an appreciation, as predicted by uncovered interest rate parity.

Reactions of real yields and inflation expectations to forward guidance in the United States

We study the impact of forward policy rate guidance by the Federal Reserve’s Federal Open Market Committee (FOMC) used as an unconventional monetary policy tool at the zero lower bound of the policy rate on real and breakeven US Treasury yield curves. We find that explicit FOMC policy rate guidance announcements led to a significant reduction in real yields at horizons of 2 to 5 years ahead. By contrast, long-term breakeven inflation rates were little affected, suggesting that inflation expectations have remained well anchored, and that explicit FOMC policy rate guidance has not adversely affected central bank credibility.

Effects of Explicit FOMC Policy Rate Guidance on Market Interest Rates

We quantify the impact of explicit FOMC policy rate guidance used as an unconventional monetary policy tool at the zero lower bound of the policy rate on market interest rates. We study the impact on short- to medium-term interest rates implied by Eurodollar interest rate futures contracts, and on near- to long-term interest rates implied by US Treasury securities. We find that explicit policy rate guidance announcements significantly reduced interest rates implied by Eurodollar futures at horizons of 1 to 5 years ahead, with the largest effect at the intermediate horizon of 3 years. We also find that they significantly reduced forward interest rates implied by US Treasuries at horizons of 1 to 7 years ahead, with the largest effect at the intermediate horizons of 4 and 5 years. Moreover, we find that explicit FOMC policy rate guidance led to a significant reduction in the term spread, ie to a fiattening of the yield curve, both for the Eurodollar futures curve and the US Treasury yield curve.

Reactions of Real Yields and Inflation Expectations to Forward Guidance in the United States

We study the impact of forward guidance used as an unconventional monetary policy tool at the zero lower bound of the policy rate on real and breakeven US Treasury yield curves. We find that explicit FOMC policy rate guidance announcements led to a significant reduction in real yields. By contrast, breakeven inflation rates were barely affected, if at all, suggesting that inflation expectations have remained well-anchored, and that explicit FOMC policy rate guidance has not adversely affected central bank credibility.

Measuring Bond Portfolio Value at Risk and Expected Shortfall in US Treasury Market

This paper measured the value at risk (VaR) and expected shortfall (ES) of the US Treasury yield changes. The US Treasury yield data were tested and found to be not normally distributed. Consequently, the mixture normal model (MNM) was used to improve the delta normal VaR and ES measures. It performed extraordinarily well in all cases, based on bootstrapping and mean square error tests. In addition, the key rate model (KRM) for the risk measure of portfolios showed that VaRs but not ESs exhibited non-subadditivity at a 99% confidence level. This could be attributed to the fact that the diversification effect is weak in the US Treasury portfolios. At the same time, level, slope, and curvature (LSC) factor models as well as structural equation models (SEM) were applied for the risk sensitivity analysis of portfolios. For an investment worth $1,000 within a one-month horizon, MNM of key rates showed that the barbell portfolio had the lowest VaR ($1.398) and ES ($1.858) of all the portfolios at a 95% confidence level. On the other hand, the historical simulation of key rates revealed that at a 95% confidence level, the barbell portfolio had VaR of $1.396 and ES of $2.097 while LSC and SEM showed VaR of $1.122 and ES of $1.434, and VaR of $1.179 and ES of $1.505, respectively. According to LSC and SEM, the barbell was affected the most by level, and long-term factors. It was also found that the bullet was affected by curvature, level, and medium-term factors.