https://orcid.org/0009-0002-1765-7052
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Maksim Isakin, Phuong V Ngo, The U.S. Treasury Term Premia in a Low Interest Rate Regime, Journal of Financial Econometrics, Volume 23, Issue 3, 2025, nbae030, https://doi.org/10.1093/jjfinec/nbae030
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Abstract
This article aims to rationalize major shifts in yields and term premia for the U.S. Treasury securities since 1961. To this end, we build and estimate a Markov switching model that features a distinctive regime where short-term interest rates are at the effective lower bound (ELB). Our empirical results show that the conditional covariance between long-run consumption growth and target inflation became significantly more positive at the ELB, which is consistent with the economic theory. More importantly, this change led to nominal bonds being a better hedge against low economic growth, causing a downward shift in term premia and yields. In addition, we can generate yields that match the U.S. data.
