The Romanian Yield Curve: the Expectations Hypothesis and Connections to the Real Economy

This paper discusses the construction of the yield curve in Romania using the prices on the primary and secondary bond markets, and studies its relationship with other macroeconomic variables. Although the data are scarce and volatile, especially those on the secondary market, several conclusions can be drawn: (a) Up to 1 year, BUBOR is a good approximation of T-bill yields, suggesting that BUBOR is followed closely when bidding for T-bills; (b) On the primary market yields are higher than on the secondary market, which indicates a winner's curse in the bidding phase; (c) The expectation hypothesis does not hold; the market still anticipates the direction, but not the degree of change in the interest rates; (d) A large part of yield curve movements is due to factors that affect all maturities equally (level factors); (e) The Taylor rule is verified in its backwards-looking form, but not in the original, no-lag, form (f) The connections between the yields and the real economy are difficult to assess because of the scarcity and volatility of data; however, from the two models used, the one that incorporates the price of a commodity (oil) is better for predicting short term yields, and the one without the commodity price is better for predicting medium-term yields.