After so many years of zero rates and massive quantitative easing programs suppressing
term premiums, the risk of significantly higher US rates may still be underappreciated.
On the downside, rich asset valuations and very compressed
term premiums raise the possibility of a financial market correction, which could dampen growth and confidence.
Jonathan Wright suggested that another approach to avoiding the problem of the zero lower bound is to lower
term premiums through asset purchases, which may be more politically feasible than raising the 2 percent inflation target.
However, there is little empirical evidence for the relationship between r* and bond premiums, particularly for
term premiums, which are the primary channel through which asset purchases operate.
People with little prospect of increasing their income sufficiently to pay ever-increasing
term premiums face a difficult trade-off.
The Sanders proposal boils down to this: The federal government, Constitution notwithstanding, would impose trillions of dollars in new taxes Sanders prefers the
term premiums on nearly all Americans.
Thus, we cannot predict simply from inspection how
term premiums on Treasury securities behave following a Fed funds shock.
However, this relationship ignores
term premiums and the policies directly aimed at lowering long-term yields in the unconventional policy period.
Crucially, Cluttons believes that through such public transportation infrastructure investments, the government is adding long
term premiums to residential values and commercial rents.
The second strand of the literature uses lower-frequency (monthly) data to test the implication of the portfolio balance effect--namely, that there is a positive relationship between bond
term premiums (and, consequently, bond yields) and the maturity structure of the publics holding of Treasury debt and long-term Treasury yields (e.
Term premiums were set lower as buyers expected reduced import demand from Saudi Arabia and more supply from the Middle East next year due to new refining capacity and expansion of existing plants, the sources said.
The model includes stochastic shocks to output, potential output, deficits, inflation, and interest rate
term premiums and is simulated around an extended WEO baseline for a typical advanced economy.
