Working Paper

Why Have Long-term Treasury Yields Fallen Since the 1980s? Expected Short Rates and Term Premiums in (Quasi-) Real Time

Abstract: Treasury yields have fallen since the 1980s. Standard decompositions of Treasury yields into expected short-term interest rates and term premiums suggest term premiums account for much of the decline. In an alternative real-time decomposition, term premiums have fluctuated in a stable range, while long-run expected short-term interest rates have fallen. For example, a real-time decomposition of the 10-yr. Treasury yield shows term premiums essentially equal in late 2013 and 2023, while the long-run value of expected short-term interest rates is estimated to have fallen in a manner similar to the FOMC’s Summary of Economic Projections and estimates from research on long-run neutral interest rates. These results suggest standard decompositions may overstate the role of term premiums in fluctuations of the yield curve.

Keywords: Term structure model; Recursive and rolling least squares; Real-time data;

JEL Classification: E43; E44; E47;

https://doi.org/10.17016/FEDS.2024.054

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2024-07-12

Number: 2024-054