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A New Conundrum in the Bond Market?

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  • Michael D. Bauer

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.

Suggested Citation

  • Michael D. Bauer, 2017. "A New Conundrum in the Bond Market?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfel:00149
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    Cited by:

    1. Ana Aguilar & María Diego-Fernández & Rocio Elizondo & Jessica Roldán-Peña, 2022. "Term premium dynamics and its determinants: the Mexican case," BIS Working Papers 993, Bank for International Settlements.
    2. Aguilar-Argaez Ana María & Diego-Fernández Forseck María & Elizondo Rocío & Roldán-Peña Jessica, 2020. "Term Premium Dynamics and its Determinants: The Mexican Case," Working Papers 2020-18, Banco de México.
    3. Ibarra-Ramírez Raúl, 2021. "The Yield Curve as a Predictor of Economic Activity in Mexico: The Role of the Term Premium," Working Papers 2021-07, Banco de México.
    4. Kučera, Adam, 2020. "Identification of triggers of U.S. yield curve movements," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).

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