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Working Paper
A Portfolio-Balance Approach to the Nominal Term Structure
Explanations of why changes in the relative quantities of safe debt seem to affect asset prices often appeal informally to a ?portfolio balance? mechanism. I show how this type of effect can be incorporated in a general class of structural, arbitrage-free asset-pricing models using a numerical solution method that allows for a wide range of nonlinearities. I consider some applications in which the Treasury market is isolated, investors have mean-variance preferences, and the short-rate process is truncated at zero. Despite its simplicity, a version of this model incorporating inflation can ...
Working Paper
Unspanned macroeconomic factors in the yield curve
In this paper, we extract common factors from a cross-section of U.S. macro-variables and Treasury zero-coupon yields. We find that two macroeconomic factors have an important predictive content for government bond yields and excess returns. These factors are not spanned by the cross-section of yields and are well proxied by economic growth and real interest rates.
Report
Why Mortgage Rates Exceed Treasury Yields
The mortgage spread—the gap between the 30-year fixed mortgage rate and the yield on 10-year U.S. Treasury notes—is currently about 200 basis points, or 2 percentage points. Mortgages and Treasury securities have different cash flows, credit risk, and lender intermediation margins, but even after those differences are accounted for, a large and volatile gap remains. In this brief, the author argues that this remaining gap largely reflects the price of the mortgage prepayment option—a borrower’s right to pay off their mortgage at any time without incurring a penalty.
Journal Article
A Rising Star: The Natural Interest Rate in the Euro Area
The natural rate of interest, also known as r-star, is a key variable for analyzing fiscal and monetary policy. A novel method of measuring this rate for the euro area uses a yield curve model estimated directly on the prices of bonds that are indexed to euro-area inflation. Estimates suggest that the euro-area natural interest rate declined persistently in the two decades before the pandemic but has risen notably in recent years. Projections using this methodology suggest that the rate is likely to increase further, albeit more gradually.
Working Paper
Equilibrium Yield Curves with Imperfect Information
I study the dynamics of default-free bond yields and term premia using a novel equilibrium term structure model with a New-Keynesian core and imperfect information about productivity. The model generates term premia that are on average positive with sizable countercyclical variation that arises endogenously. Importantly, demand shocks, in addition to supply shocks, play a key role in the dynamics of term premia. This is in sharp contrast to existing DSGE term structure models with perfect information, which tend to rely on large supply shocks to generate timevariation in yields and term ...
Working Paper
Equilibrium Yield Curves with Imperfect Information
I study the dynamics of default-free bond yields and term premia using a novel equilibrium term structure model with a New-Keynesian core and imperfect information about productivity. Imperfect information can justify a shock to signals about productivity that does not lead to actual changes in productivity, which can be interpreted as a demand shock. When incorporated in a DSGE term structure model with a standard productivity shock, this demand shock generates term premia that are on average higher, with sizable countercyclical variation that arises endogenously. The model helps reconcile ...
Working Paper
Term Structure Modeling with Supply Factors and the Federal Reserve's Large Scale Asset Purchase Programs
This paper estimates an arbitrage-free term structure model with both observable yield factors and Treasury and Agency MBS supply factors, and uses it to evaluate the term premium effects of the Federal Reserve's large-scale asset purchase programs. Our estimates show that the first and the second large-scale asset purchase programs and the maturity extension program jointly reduced the 10-year Treasury yield by about 100 basis points.
Working Paper
The Impact of Monetary Policy on Asset Prices
Estimating the response of asset prices to changes in monetary policy is complicated by the endogeneity of policy decisions and the fact that both interest rates and asset prices react to numerous other variables. This paper develops a new estimator that is based on the heteroskedasticity that exists in high frequency data. We show that the response of asset prices to changes in monetary policy can be identified based on the increase in the variance of policy shocks that occurs on days of FOMC meetings and of the Chairman's semi-annual monetary policy testimony to Congress. The identification ...