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This paper presents more detailed evidence on the behavior and relationships of various interest rates in the United States since the Accord of March, 1951. Spectral analytic techniques are utilized in examining (1) how rates of return on different securities of specific maturity vary through time, and (2) how rates on securities with different terms to maturity appear to be related. Spectral analysis appears especially well suited to examination of interest rate relationships since it is a mathematical tool equipped to deal specifically with the mixture of randomness and regularity typically contained in an interest rate series. As such, it yields more insights into interest rate movements and relationships than conventional techniques of analysis which depend on specified periodicities. [ABSTRACT FROM AUTHOR]

The article focuses on the sensitivity of short-term international capital movement to interest rate differentials, particularly highlighting the relationship between the deposit rates of the U.S. Treasury bill and Eurodollar. Both theoretical and empirical examinations into interest rate-capital flow reactions are provided. A flow model is given for the Eurodollar market with depositors as intermediaries and the Treasury bill as a rate determinant. The stock-rate adjustment equation of Koyak-Nerlove is also empirically applied to further evaluate the interest rate differentials and seek to validate the theoretical model presented.

The information base of the study is the time series of the daily exchange rate of the currency pair USD/JPY, the US 10-year Treasury bond (TB 10), the Japanese government bond 10-year (JGB 10), the volatility index (VIX) of the Chicago Board Options Exchange (CBOE), which calculated by Bloomberg. Study period: December 1, 2015 (the date the Federal Reserve raised interest rates, which initiated a new regime - began easing its ZIRP zero interest rate policy) to December 29, 2023. The relationship between monetary policy and the currency pair USD/JPY is evaluated using 3 approaches: 1) a rally dynamic system based on the standard theory of nonlinear differential equations aimed at eliminating psychological noise (1/f noise, pink noise, trend noise with spectrum capacity); 2) regression of instrumental variables with heteroskedasticity aimed at managing unobservable sources of variability; 3) an event tracking method to measure anomalous asset price response, analyzing the daily price action of USD/JPY to detect market-related fluctuations in the exchange rate and separate the impact of general market trends from related differences in interest rates. The study found that the US Federal Reserve's (Fed's) monetary policy only occasionally affects the USD/JPY exchange rate, and it changes mainly when monetary policy deviates from expected future trajectories. Within the studied period, this happened only 3 times: growth on December 16, 2015; emergency rate reduction due to COVID-19 on March 15, 2020; and the first increase of 75 basis points on June 15, 2022 (the article estimates the impact of each of these episodes on the exchange rate). Statements by the Fed on monetary policy affect the price dynamics of the USD/JPY pair in the short term (since short-term psychological expectations play a decisive role in shaping the dynamics of the currency market), but not often (if the statement on monetary policy is consistent with market forecasts, it is practically will not affect exchange rates). The Fed's adoption of tools such as "forward guidance" and official statements to inform the future course of monetary policy indirectly affects the price dynamics of USD/JPY. The price action of USD/JPY was driven by the fundamentals of the difference in interest rates between the US and Japanese bonds, which are influenced by the monetary policy of the US Federal Reserve and the Bank of Japan (BoJ). In 2023, it could be hard to attempt to challenge FX intervention except to curb "excess volatility and disorderly movements in exchange rates" like the Minister of Finance's (MoF) 2022 intervention. [ABSTRACT FROM AUTHOR]

Empirical studies employing the term structure of interest rates have generally suffered from the defect that yield curves have been used as surrogate measures of the term structure. A number of scholars and professional bond analysts have, in the past decade, called attention to the problem (Malkiel [12], Buse [2], Weingartner [21], Homer and Leibowitz [8], and most recently Carr, Halpern and McCallum [4]) that only when the yield curve is flat can it be so used, legitimately. Only McCulloch [13] and Schaefer [18] have attempted to measure the term structure directly. In this paper we summarize briefly the analytical issues; suggest some of the uses to which term structure estimates could be put; propose an estimation method and describe some preliminary results; and finally, present an empirical application of term structure estimates in a stock valuation model. Most research papers conclude with a promise of more research. To a greater than usual degree the present paper is a promissory note because of the implications of our approach (and McCulloch's [13] and Schaefer's [18] for that matter) for a wide range of topics in financial and monetary economics. [ABSTRACT FROM AUTHOR]

In this paper, we present a new model for the measurement of yield curve relationships that is derived from interest rate theory, utilizes an objective procedure, and provides measures of the accuracy of the results obtained. In empirical tests of the model, the structure postulated is found to consistently provide a high level of explained variation in observed market yields on U.S. Treasury bonds. In a comparison with a yield curve model previously offered by Cohen et al., the present model is superior in terms of both goodness of fit and other associated statistical criteria. Clear evidence exists that the impact of coupon level upon yield is statistically significant, consistently positive in direction, substantial in magnitude, and variable over tine. These results indicate that correction for coupon differences in the calculation of forward rates for use in empirical tests of interest rate theory is necessary in order to obtain reliable results. Finally, the yield curve model is used to calculate estimates of the risk-free pure discount rate. [ABSTRACT FROM AUTHOR]

In February 4, 1994 the Federal Reserve began the practice of announcing changes in the targeted level for the federal funds rate immediately after such decisions were made. This paper investigates to what extent the policy of "the announcement" affected a key ingredient in the monetary transmission mechanism: the term structure of nominally risk-free, Treasury securities. We find that term rates react much more in unison during announcement days than at any other time. Moreover, the practice of circumscribing almost all changes in the federal funds rate target to Federal Open Market Committee (FOMC) meeting dates regiments the formation of market expectations in the overnight rate and the price discovery process of term rates, thus facilitating the Fed's goal of controlling long-term rates. [ABSTRACT FROM AUTHOR]

The article provides comments about the article "Federal Deficits, Interest Rates, and Monetary Policy." Particular attention seeks to discuss whether larger deficits lead to higher interest rates. Examined is the presumption that a rapid increase in the supply of government bonds should lead to a decrease in the price of the bonds and an increase in real interest rates. Some economists do not hold this belief. The author criticizes Dwyer for not devoting enough attention to the topic of international capital flows.

This paper re-examines the evidence relating to the term structure of interest rates. In Section 1 the explanatory power of Modigliani and Sutch's Preferred Habitat Model [12] is compared with that of a model developed by Wood [14]. Both models assume that short- and long-term U.S. Government securities are close substitutes. The principal difference between them is the importance attributed to past interest rates as an indicator of expected future rates. According to the Preferred Habitat Model, the expected change in future rates may be expressed as the difference between the current long-term rate and a weighed average of past long rates. The Wood model assumes that at any point in time the best estimate of next period's short-term rate is the current rate; past rates are irrelevant. The data used are monthly and quarterly observations of the yields on three-month Treasury bills and long-term U.S. Government bonds for the period 1951-65. The results favor the Wood model. They provide little evidence that past interest rates are a very useful indicator of expected future rates. In Section II we examine the stability of the Wood model. A regression equation relating the first difference in the yield on long-term bonds to the first difference in the bill rate is fitted to monthly observations for the period 1920-65 and nine shorter periods. The results are quite striking. They indicate that essentially the same relationship holds for the 1920's and early 1930':, the pre-Accord period (1947-51), the months surrounding the recessions of 1953-54 and 1957-58, and the period during which the Federal Reserve attempted to twist the yield curve (1962-65). Thus, it appears that since the establishment of the Federal Reserve System the effects of open market operations in either short- or long- term government securities have been transmitted to the other end of the yield curve in a very prompt and predictable way. [ABSTRACT FROM AUTHOR]

The article examines various hypotheses regarding the term structure of interest rates. The relationship between long-term and short-term interest rates is crucial for macroeconomic policy evaluation. Since the short-term interest rate is the opportunity cost of holding money, it is widely believed that the Federal Reserve has more direct control over short-term than overlong-term interest rates in the United States. The most prevalent explanation of the term structure is the expectations theory, which posits that the expected holding returns on bonds of different maturities are equalized, or that they differ by constant term premiums. The theory implies that long rates depend on current and expected short rates. The slope of the yield curve, the spread between long rates and short rates, reflects the market's forecast of changes in interest rates. The test of the expectations theory entails examining whether a steeply sloped yield curve portends an increase in interest rates. Of course, market expectations need not always be realized, since new developments may intercede. Under the assumption of rational expectations, however, the expectations theory implies that a steeply sloped yield curve should on average signal an increase in interest rates.

The article evaluates what impact discount rate change announcements had on the U.S. stock market interest rates between 1973 to 1985 and whether these changes also indicated alterations to the federal funds rate. The federal funds rate and the U.S. Treasury bill rate are assumed to be, for the purposes of this investigation, calculated by the expectations theory of the term structure. The article concludes that the U.S. Federal Reserve used three different types of announcements during the period under investigation. The second and third type were found to also indicate changes in the federal funds rate.

We evaluate the effect of the Federal Reserve's purchase of long-term Treasuries and other long-term bonds (QE1 in 2008-09 and QE2 in 2010-11) on interest rates. Using an event-study methodology, we reach two main conclusions. First, it is inappropriate to focus only on Treasury rates as a policy target, because quantitative easing works through several channels that affect particular assets differently. We find evidence for a signaling channel, a unique demand for long-term safe assets, and an inflation channel for both QE1 and QE2, and a mortgage-backed securities (MBS) prepayment channel and a corporate bond default risk channel for QE1 only. Second, effects on particular assets depend critically on which assets are purchased. The event study suggests that MBS purchases in QE1 were crucial for lowering MBS yields as well as corporate credit risk and thus corporate yields for QE1, and Treasuries- only purchases in QE2 had a disproportionate effect on Treasuries and agency bonds relative to MBSs and corporate bonds, with yields on the latter falling primarily through the market's anticipation of lower future federal funds rates. [ABSTRACT FROM AUTHOR]

The article provides an outlook for the money market in the U.S. for 1959. The article discusses the importance of the business picture for the money market and the characteristics of the money market including the shifting of participation by lenders and borrowers, the volatility of interest rates, and the evolutionary changes of instruments. The author examines information on the volatility of interest rates and discusses federal funds. The article also takes a look at issues related to the provision of bank loans to government security dealers.

The purpose of this paper is to conduct a comparative test of several of the competing theories of the determinants of term premiums, employing data on the yields of three, six, nine and twelve-month Treasury bills. The basic methodology, employed—directly or indirectly—in several recent studies of the term structure, is to invoke the rational expectations hypothesis of John F. Muth to create a series of synthetic interest rate forecasts and thus to isolate the term premiums implicit in the forward rates in the empirical term structure. As will be shown, Treasury bill data are particularly well-suited to exploit this more rigorous treatment of the mechanism by which expectations are presumed to be formed. On an a priori basis, one might expect the relative capital certainty of Treasury bills to reduce the value of the more conventional risk-return models, whose application may be more relevant to an analysis of the full spectrum of interest rate maturities. On the other hand, support for the more conventional models of the determinants of term premiums garnered from the short-end of the maturity spectrum could serve to strengthen the case for their overall validity. The study proceeds in three stages. In the first, the sue of the rational expectations hypothesis to isolate the term premiums is described. In the second, the competing theories of the determinants of term premiums are sketched briefly. In the third, the data base is described and the empirical results presented. A summary section completes the paper. The purpose of this paper is to conduct a comparative test of several of the competing theories of the determinants of term premiums, employing data on the yields of three, six, nine and twelve-month Treasury bills. The basic methodology, employed—directly or indirectly—in several recent studies of the term structure, is to invoke the rational expectations hypothesis of John F. Muth to create a series of synthetic interest... [ABSTRACT FROM AUTHOR]

Despite powerful advances in interest rate curve modeling for data-rich countries in the last 30 years, comparatively little attention has been paid to the key practical problem of estimation of the term structure of interest rates for emerging markets. This may be partly due to limited data availability. However, emerging bond markets are becoming increasingly important and liquid. It is, therefore, important to be understand whether conclusions drawn from developed countries carry over to emerging markets. We estimate model parameters of fully flexible Nelson-Siegel-Svensson term structures model which has become one of the most popular term structure model among academics, practitioners, and central bankers. We investigate four sets of bond data: U.S. Treasuries, and three major emerging market government bond data-sets (Brazil, Mexico and Turkey). By including both the very dense U.S. data and the comparatively sparse emerging market data, we ensure that are results are not specific to a particular data-set. We find that gradient and direct search methods perform poorly in estimating term structures of interest rates, while global optimization methods, particularly the hybrid particle swarm optimization introduced in this paper, do well. Our results are consistent across four countries, both in- and out-of-sample, and for perturbations in prices and starting values. For academics and practitioners interested in optimization methods, this study provides clear evidence of the practical importance of choice of optimization method and validates a method that works well for the NSS model. [ABSTRACT FROM AUTHOR]

This article focuses on the credit-rationing hypothesis as under the classical interest-cost doctrine. The post World War II revival of monetary policy as an economic regulator in Great Britain and the U.S. has been accompanied by lively discussion and some new contributions to monetary theory. Important among them is the credit-rationing doctrine. Briefly, this is the doctrine that central bank operations on the money market affect investment, not mainly through the cost of credit, but through its availability. When the central bank pushes up the yields of short-term government securities, banks and nonbank lenders will increase the share of short-term governments in their portfolios at the expense of other earning assets. This action reduces reserves for the banking system as a whole and causes further restriction of loans to business borrowers. Conversely, when the central bank pushes down money-market rates, the decreased attractiveness of short-term yields, and the increase of reserves, will lead to increased availability of loan funds at relatively unchanging cost. The author argues that there should be an observable negative relation between interest variations and investment.

Expectations theories of asset returns may be interpreted either as stating that risk premia are zero or that they are constant through time. Under the former interpretation, different versions of the expectations theory of the term structure are inconsistent with one another, but I show that this does not necessarily carry over to the constant risk premium interpretation of the theory. I present a general equilibrium example in which different types of risk premium are constant through time and dependent only on maturity. Furthermore, I argue that differences among expectations theories are second-order effects of bond yield variability. I develop an approximate linearized framework for analysis of the term structure in which these differences disappear, and I test its accuracy in practice using data from the CRSP government bond tapes. [ABSTRACT FROM AUTHOR]

The article presents the results of an equilibrium model created to analyze the pricing of U.S. government bonds for the period of 1958-1979. The bond pricing model relies on the assumption that there are only two independent stochastic factors which are two interest rates; the short rate and the consol rate. These determine bond prices and the shape and position of the yield curve at any point of time. The model also considers Arbitrage Pricing theory, the term structure of interest rates, and the relative rates of return on bonds with different coupons and maturities.

Throughout the 1930s and early 1940s, U.S. Treasury bonds and notes appeared to have negative nominal yields as they approached maturity. But negative nominal interest rates are impossible in a world in which one can always hold cash. The resolution to this puzzle is that Treasury securities, in addition to making coupon payments, gave the owner the right to buy a new security on a future date. This paper describes the institutional environment that led to the apparent negative nominal interest rates, develops a method for valuing the "exchange privilege," and computes accurate measures of the yield to the coupon-bearing component of these composite bond/options. These corrected bond and note yields are then used to calculate new estimates of the term structure of interest rates from 1929 to 1949. [ABSTRACT FROM AUTHOR]

The effect of policy regime changes on real interest rates has important implications for financial and economic theory. However, there is little current evidence that such changes have any impact on the level of real interest rates. In this paper, we estimate both the number and location of structural breaks in the three-month U.S. real interest rate using a global optimization technique developed by Bai and Perron (1998). We compare the timing of large political changes to the dating of these structural breaks. We find that changes in party control of either a branch of Congress or the presidency are largely consistent with the timing of real rate shifts, while changes in the Federal Reserve chair are generally inconsistent with real rate regime shifts. [ABSTRACT FROM AUTHOR]

The behavior of different components of municipal bond yields may have a significant impact upon bond price behavior. Specifically, demand premiums created by banks may stabilize bond yields in some maturity ranges but not in others; for example, short-term municipals may be stabilized but not long-term. This research implies that bank demand behavior may create demand premiums that stabilize prices of short-term municipal bonds relative to those of Treasury bonds of like maturity. While this implication is inconsistent with the residual theory of bank demand, it is consistent with the tax-shield theory attributed to Hendershott and Koch. [ABSTRACT FROM AUTHOR]

In an efficient market, information about any determinant of interest rates should be quickly incorporated into observed rates. Thus, when information about the size of the deficits is released, a relatively quick impact on interest rates can be anticipated. More specifically, if an increase in the deficit is, in fact, associated with higher interest rates, then an unanticipated announcement of a larger deficit should lead to a response in financial markets, which increases interest rates. This paper provides evidence on the announcement effects of information on the deficit. The macroeconomic hypothesis underlying this investigation is simply that an increase in the current or future deficit leads to an increase in yields on government securities in anticipation of higher levels of debt financing. In a rational expectations framework, an announcement of higher future deficits will lead to a current increase in interest rates in anticipation of future financing. Thus, the examination of announcement effects enables us to substantiate a relationship between interest rates and deficits without encountering the econometric problems of reduced form modeling.

Current 1-year forward rates on 1- to 5-year U. S. Treasury bonds are information about the current term structure of 1-year expected returns on the bonds, and forward rates track variation through time in 1-year expected returns. More interesting 1-year forward rates forecast changes in the 1-year interest rate 2- to 4-years ahead, and forecast power increases with the forecast horizon. We attribute this forecast power to a mean-reverting tendency in the 1-year interest rate. [ABSTRACT FROM AUTHOR]

To a first approximation, long-term interest rates behave like short-term interest rates. For example, the yields on twenty-year treasury bonds and on one-month treasury bills tend to peak and to bottom out together. Thus people often speak of "the level of interest rates" without specifying maturity. The spread between long and short rates tends to be unusually small or even negative when short rates are high relative to the experience of the last few years. Economists Franco Modigliani and Richard Sutch showed that the relation between long and short rates can be well described by expressing the long rate as a five-year distributed lag of short rates, with the coefficients summing to about one and with substantial weight on the current short rate. Recent experience upholds this characterization except that the distributed lag has become shorter. Equivalently, the spread between long and short rates is well explained by current and lagged short rates, with approximately equal and opposite coefficients on the current rate and the sum of lagged rates.

In this article the author analyses the reasons behind the rise of interest rates of the U.S. government bonds. This rise in rates has been shared by all types of government securities. The principal explanation given by the empirical studies and econometric models is that interest rates have risen because liquidity has fallen, investors have relinquished their liquidity only to higher interest rates. The author deny that the commonly used ratios measuring liquidity do any more than register certain structural changes in the economy. And thus these ratios cannot explain the rise in interest rates. The author here argues this point and outlines an explanation for these rise in interest rates. The liquidity hypothesis implies that the mechanism is one of the Investors requiring higher interest rates be paid to them for holding smaller fractions of their portfolios in liquid assets, or smaller fractions of liquid assets relative to income. According to the author it is in the real forces of demand relative to supply that the ultimate explanation of the upward trend lies.

Economists have recently begun to devote an increasing amount of attention to the relationships among interest rates on various instruments. This paper presents the results of an examination of the relationships among several interest rates on the U.S. government and corporate bonds for the period January 1951 through December 1960. Monthly data are used, and series for the rates on three-month treasury bills, one, two, three, four, five, ten, and twenty-year government bonds and commercial paper are studied. This list represents an array of instruments ranging over a broad maturity spectrum and featuring various levels of quality. Tools of spectral and cross-spectral analysis are used to study the behavior of the series and the relationships among the series at various important components of oscillation. In addition to calculating the standard statistics associated with the spectrum and cross-spectrum, the relatively new tool of complex demodulation is employed to study the seasonal behavior of selected rates.

This article presents a statistical investigation of the movements in interest rates since 1953 to determine whether they conform to the supposition of the "bills-only" theory. The substantive propositions of this theory concerning interest rate behavior are summarized in different sections. Although Federal Reserve officials made numerous attempts to explain and justify the "bills-only" policy, they did not articulate an explicit theory of interest rates. One of the most influential statements of the underlying theory is due to writer W. Riefler who attempted to internationalize the policy. He first points out that any change in availability of funds is likely to be reflected first in the bill sector and that changes in the tone or direction of money markets that appear first in the bill sector of the government securities market soon spread to the other sectors. He then follows this up with the observation that the major effect of direct operations in long-term securities on basic supply-demand relationships would come from the fact that reserves were supplied or withdrawn, not the fact that long-term securities were purchased or sold.

Why are interest rates so low in the Unites States? We find that they are low primarily because the premium for safety and liquidity has increased since the late 1990s, and to a lesser extent because economic growth has slowed. We reach this conclusion using two complementary perspectives: a flexible time series model of trends in Treasury and corporate yields, inflation, and long-term survey expectations; and a medium-scale dynamic stochastic general equilibrium model. We discuss the implications of this finding for the natural rate of interest. [ABSTRACT FROM AUTHOR]

This paper shows that the spread between the 3-month Treasury bill and the federal funds rate has significant predictive power for the future change in the federal funds rate during the volatile nonborrowed reserves operating regime, but it has less and no predictive power during the borrowed reserves regime and the federal funds targeting regime, respectively. These findings suggest that Treasury bill rates forecast future federal funds rates most accurately when the Federal Reserve follows a well-defined rule that does not smooth the impact of shocks on the federal funds rate. [ABSTRACT FROM AUTHOR]

The article first examines the operating behavior of the Federal Reserve between 1914 and 1917. It is explained that during this period, there were many institutional constraints that had to be relaxed for the Federal Reserve to operate effectively. The article offers some empirical evidence that the 1917 amendments affected the seasonal behavior of notes issues and interest rates. When the institutional behavior of the Federal Reserve is investigated it is revealed that the amendments made during the period were necessary for the successful financing of the First and subsequent Liberty bond campaigns.

The article examines a general equilibrium approach to the Eurocurrency market. The model used in this research looks at both the U.S. and Europe and the interaction between their banks, the role of the American dollar, and the importance of central banks for the Eurodollar market. The way in which both European and U.S. banks allocate demand deposits and the formulas used to control that allocation are discussed. The article concludes that monetary policies in Europe and the U.S. did have a direct effect on the markets, particularly their interest rates.

Three policies of the Federal Home Loan Bank Board, the Specially Priced Advances Program in 1970–1, a program of advances at a reduced interest rate in 1974, and changes in the minimum liquidity ratio, are analyzed. A model of portfolio allocation is developed and estimated for savings and loan associations. Most of the net increase in advances borrowed under the first two programs have not been lent in the mortgage market. Reductions in the minimum liquidity requirement have resulted in an increase in mortgage lending, but substantial effects are not felt until a year after the liquidity requirement is reduced. [ABSTRACT FROM AUTHOR]

The article presents research investigating the term structures in interest rates within the government bond market, highlighting the role of price pressure. Introductory information is given describing the "preferred-habitat" theory of bond selection and advocating its application within standard economic theory. Two economic case studies are provided through the preferred habitat method, including the 2004 British pension reforms and the U.S. Treasury buyback program of 2000-2001. Long term interest rate shifts which occurred in response to these events are illustrated and explained through the paradigm.

The article focuses on the economic policies surrounding the reduction of debt management costs within the U.S. Department of the Treasury. Despite not being of primary importance, the virtues of studying Treasury interest payment structures are outlined. An alternative debt-marketing technique is presented, asking whether the sealed-bid auctioning off of long-term securities could provide for a more efficient system. A history of the method as seen in U.S. economic policy is given and commonly raised objections are discussed. Conclusions are offered suggesting the system could be efficient in times of growth.

This article presents information about postwar changes in commercial bank investments in U.S. government securities. The author notes that there has been a significant decrease in the amount of government securities held by commercial banks since this figure peaked in February, 1946. The author investigates the reasons behind this decrease and discusses the management of bank portfolios. Some of the contributing factors responsible for the decrease include the retirement by the U.S. Treasury of government securities held by the commercial banking system and the sale of government securities to finance loans to private borrowers and to meet increases in reserve requirements.

Focuses on the relationship between short- and long-term interest rates in the United States. Review of the academic literature on the term structure; United States Treasury securities; Expectations hypothesis of the term structure; Monetary policy and the United States bond market in spring 1994.