Department or Program

Economics

Abstract

U.S. 10-year yields have declined by over 11 percentage points from above 14% in 1982 to under 3% in February 2019. This is not only a U.S. phenomenon, but most advanced and emerging economies have experienced a similar decline in long-term yields. Yields can be decomposed into two components: the expectations component and the term premium. The expectations component is defined as the expected average short-term rate over the duration of the bond, while the term premium is the extra compensation for holding a long-term asset. In this thesis, I decompose yields of various countries into the expectations component and the term premium using a term structure model estimated through linear regressions as in Adrian, Crump, and Moench (2013). I report yield decomposition for the following 24 countries: Australia, Brazil, Canada, Chile, China, Colombia, the Czech Republic, the Euro Area, Hungary, Indonesia, Japan, Malaysia, Mexico, Norway, New Zealand, Peru, the Philippines, Poland, South Africa, Singapore, Sweden, Switzerland, the United Kingdom, and the United States; some of which are not well documented in current economic literature. Using both panel and individual data, I provide evidence that decreasing inflation expectations and inflation risk premia are major factors contributing to the decline in global yields. I also construct two global inflation indices and show that global inflation is an important factor driving the decline of long-term yields. Lastly, I provide supporting evidence that inflation targeting by monetary policy authorities is driving down inflation uncertainty and hence yields. Given the importance of long-term interest rates for the decision-making process of households and businesses, understanding the major factors behind the decline in the term premium is of paramount importance for policy makers, governments, corporations, and consumers alike.

Level of Access

Open Access

First Advisor

Yung, Julieta

Date of Graduation

5-2019

Degree Name

Bachelor of Arts

Number of Pages

45

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