Journal Article

A New Conundrum in the Bond Market?

Abstract: When the Federal Reserve raises short-term interest rates, the rates on longer-term Treasuries are generally expected to rise. However, even though the Fed has raised short-term interest rates three times since December 2016 and started reducing its asset holdings, Treasury yields have dropped instead. This decoupling of short-term and long-term rates is reminiscent of the ?Greenspan conundrum? of 2004?05. This time, however, evidence suggests compelling explanations?a lower ?normal? interest rate, the risk of persistently low inflation, and fiscal and geopolitical uncertainty?may account for the yield curve flattening.

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Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: FRBSF Economic Letter

Publication Date: 2017

Order Number: 34