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Federal Reserve Bank of San Francisco
Working Paper Series
The bond yield "conundrum" from a macro-finance perspective
Glenn D. Rudebusch
Eric T. Swanson
Tao Wu

In 2004 and 2005, long-term interest rates remained remarkably low despite improving economic conditions and rising short-term interest rates, a situation that former Fed Chairman Alan Greenspan dubbed a "conundrum." We document the extent and timing of this conundrum using two empirical no-arbitrage macro-finance models of the term structure of interest rates. These models confirm that the recent behavior of long-term yields has been unusual--that is, it cannot be explained within the framework of the models. Therefore, we consider other macroeconomic factors omitted from the models and find that some of these variables, particularly declines in long-term bond volatility, may explain a portion of the conundrum. Foreign official purchases of U.S Treasuries appear to have played little or no role.

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Glenn D. Rudebusch & Eric T. Swanson & Tao Wu, The bond yield "conundrum" from a macro-finance perspective, Federal Reserve Bank of San Francisco, Working Paper Series 2006-16, 2006.
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Keywords: Monetary policy - United States ; Federal funds rate ; Treasury bonds
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