We study the drift and cyclical components in U.S. Treasury bonds. We find that bond yields are drifting because they reflect the drift in monetary policy rates. Empirically, modeling the monetary policy drift using demographics and productivity trends, plus long-term inflation expectations, leads to cyclical deviations of bond prices from their drift that predict bond returns in- and out-of-sample. These bond cycles can be interpreted as term premia or/and temporary deviations from rational expectations in a behavioral framework. Through the lens of our model, we detect a significant role of the latter in determining the cyclical properties of yields with short maturities.

Monetary policy and bond prices with drifting equilibrium rates

Favero, Carlo A.
Membro del Collaboration Group
;
Tamoni, Andrea
In corso di stampa

Abstract

We study the drift and cyclical components in U.S. Treasury bonds. We find that bond yields are drifting because they reflect the drift in monetary policy rates. Empirically, modeling the monetary policy drift using demographics and productivity trends, plus long-term inflation expectations, leads to cyclical deviations of bond prices from their drift that predict bond returns in- and out-of-sample. These bond cycles can be interpreted as term premia or/and temporary deviations from rational expectations in a behavioral framework. Through the lens of our model, we detect a significant role of the latter in determining the cyclical properties of yields with short maturities.
Favero, Carlo A.; Melone, Alessandro; Tamoni, Andrea
File in questo prodotto:
File Dimensione Formato  
FECMbondsv19.pdf

accesso aperto

Descrizione: Article
Tipologia: Documento in Post-print (Post-print document)
Licenza: Creative commons
Dimensione 566.09 kB
Formato Adobe PDF
566.09 kB Adobe PDF Visualizza/Apri
JFQA_acceptance.pdf

non disponibili

Descrizione: acceptance letter
Tipologia: Allegato per valutazione Bocconi (Attachment for Bocconi evaluation)
Licenza: NON PUBBLICO - Accesso privato/ristretto
Dimensione 81.17 kB
Formato Adobe PDF
81.17 kB Adobe PDF   Visualizza/Apri   Richiedi una copia

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11565/4049765
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus ND
  • ???jsp.display-item.citation.isi??? ND
social impact