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Working Paper
Bond Risk Premiums at the Zero Lower Bound
This paper documents a significantly stronger relationship between the slope of the yield curve and future excess bond returns on Treasuries from 2008-2015 than before 2008. This new predictability result is not matched by the standard shadow rate model with Gaussian factor dynamics, but extending the model with regime-switching in the (physical) dynamics of the factors at the lower bound resolves this shortcoming. The model is also consistent with the downwards trend in surveys on short rate expectations at long horizons, but requires a break in the level of its factors to closely fit the ...
Working Paper
The Effects of Volatility on Liquidity in the Treasury Market
We study the relationship between volatility and liquidity in the market for on-the-run Treasury securities using a novel framework for quantifying price impact. We show that at times of relatively low volatility, marginal trades that go with the flow of existing trades tend to have a smaller price impact than trades that go against the flow. However, this difference tends to diminish at times of high volatility, indicating that the perceived information content of going against the flow is less when volatility is high. We also show that market participants executing trades aggressively using ...
Discussion Paper
What Do Quoted Spreads Tell Us About Machine Trading at Times of Market Stress? Evidence from Treasury and FX Markets during the COVID-19-Related Market Turmoil in March 2020
We highlight four main results from our analysis. First, we find that quoted spreads did not merely rise to much higher than usual levels on average, but were also oscillating over a wider range; while at some points within the day spreads were substantially wider than on a typical day, at other times spreads were as narrow as on a typical day. This result suggests that market participants, likely including both dealers and PTFs, became less willing to replenish the order book fast enough to keep quoted bid-ask spreads consistently tight in these markets, which may have amplified the initial ...
Discussion Paper
The Treasury Market Flash Event of February 25, 2021
The Treasury market flash event of February 25, 2021 underscores the pivotal role of high-speed liquidity provision in the most liquid electronic parts of the Treasury market. We find evidence that the sharp drop in prices that day was accompanied by a sudden drop in market depth and a brief deterioration in high-speed liquidity provision amid elevated transaction volumes, albeit to a much lesser extent than during the episode of severe illiquidity in March 2020. Similar to some previous episodes accompanied by moderately elevated economic and financial market uncertainty, market depth has ...
Working Paper
High-Frequency Estimates of the Natural Real Rate and Inflation Expectations
We propose a new method of estimating the natural real rate and long-horizon inflation expectations, using nonlinear regressions of survey-based measures of short-term nominal interest rates and inflation expectations on U.S. Treasury yields. We find that the natural real rate was relatively stable during the 1990s and early 2000s, but declined steadily after the global financial crisis, before dropping more sharply to around 0 percent during the recent COVID-19 pandemic. Long-horizon inflation expectations declined steadily during the 1990s and have since been relatively stable at close to 2 ...
Discussion Paper
Robustness of Long-Maturity Term Premium Estimates
This Note explains the differences between two of the models used to produce estimates of US Treasury term premiums which are produced by staff in the Federal Reserve System.
Discussion Paper
Predicting Recession Probabilities Using the Slope of the Yield Curve
In this FEDS Note, we examine the predictions of various models and recent surveys of the probability of a recession in the near term.
Working Paper
A Shadow Rate or a Quadratic Policy Rule? The Best Way to Enforce the Zero Lower Bound in the United States
We study whether it is better to enforce the zero lower bound (ZLB) in models of U.S. Treasury yields using a shadow rate model or a quadratic term structure model. We show that the models achieve a similar in-sample fit and perform comparably in matching conditional expectations of future yields. However, when the recent ZLB period is included in the sample, the models ' ability to match conditional expectations away from the ZLB deteriorates because the time-series{{p}}dynamics of the pricing factors change. In addition, neither model provides a reasonable description of conditional ...
Discussion Paper
Expectations about the Federal Funds Rate in the Long Run
To what extent does the persistent relatively low level of the federal funds rate reflect a decline in its long-run equilibrium? In this Note, we examine how views have evolved on that question among professional forecasters, Federal Open Market Committee (FOMC) participants, and investors in bond markets.
Discussion Paper
New Financial Market Measures of the Neutral Real Rate and Inflation Expectations
Long-term U.S. interest rates have fallen substantially over the last two decades. The 5-to-10-year nominal forward interest rate implied by the prices of U.S. Treasury securities is now about 7 percentage points lower than it was at the start of the 1990s.