Magazine article Economic Trends

Money and Financial Markets

Magazine article Economic Trends

Money and Financial Markets

Article excerpt

The secular decline in long-term rates that began in 1982 resulted primarily from a decline in the inflation expectations associated with a sustained disinflation. However, as inflation approached zero after the 2001 economic downturn, policymakers became concerned about their ability to deal with a potential deflation. Short-term interest rates were taken down and kept near or below inflation, and the FOMC's policy statements emphasized its intent to keep rates low for a considerable period. Such an emphasis probably kept long-term rates low.

The continued stability of long-term nominal interest rates at relatively low levels over the past year has been described as a conundrum. As the economy recovered and the threat of deflation abated, both nominal and real long-term rates were expected to rise. But real 10-year interest rates, as measured by rates on Treasury inflation-protected securities (TIPS), continued to fall relative to their nominal counterparts. Thus, expected inflation--measured as the difference between nominal and real interest rates--tended to rise. In part, this may reflect liquidity limitations in the TIPS market. On the other hand, survey data also suggest a slight upcreep in inflation expectations recently in the face of declining nominal Treasury rates.

Some recent downward pressure on Treasury rates may reflect a shift to quality. Holders of privately issued instruments have been demanding a greater premium for risk. Yield spreads between corporate bonds and 10-year Treasury notes have widened, especially for riskier assets such as high-yield bonds, commonly known as junk bonds. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.