Risk Premiums and Short-term Rates

Jeremy Stein sees a connection.

over a sample period from 1999 to 2012, a 100 basis point increase in the 2-year nominal yield on FOMC announcement day–which we take as a proxy for a change in the expected path of the federal funds rate over the following several quarters–is associated with a 42 basis point increase in the 10-year forward overnight real rate, extracted from the yield curve for Treasury inflation-protected securities (TIPS).

…These changes in term premiums then appear to reverse themselves over the following 6 to 12 months.

…Banks fit with our conception of yield-oriented
investors to the extent that they care about their reported earnings–which, given bank accounting rules for available-for-sale securities, are based on current income from securities holdings and not mark-to-market changes in value. And, indeed, we find that when the yield curve steepens, banks increase the maturity of their securities holdings.

Thanks to Tyler Cowen for the pointer.

If this is correct, then monetary policy affects long-term real rates, although having the effect reverse itself within 6 to 12 months makes me wonder. In fact, this whole thing makes me wonder….

1 thought on “Risk Premiums and Short-term Rates

  1. You write, “monetary policy affects long-term real rates, although having the effect reverse itself within 6 to 12 months makes me wonder. In fact, this whole thing makes me wonder.”

    I respond, the No Taper Rally of September 18, 2013, in World Stocks, Major World Currencies, DBV, and Emerging Market Currencies, was Liberalism’s peak event, which terminated the Creature Jekyll Island, that is the Fed and the Too Big To Fail Banks, RWW, and birthed the Beast Regime of Revelation 13:1-4. and pivoted the world from a policy of investment choice … consisting of credit schemes, such as, free trade agreements, financial deregulation, leveraged buyouts, nation investment, currency carry trade investing, securitization of debt, dollarization, financialization of stocks and ETFs, such as corporate bonds which convert into stocks, all of which created capital for corporations to operate and revenue for governments to operate … to a policy of diktat … consisting of debt servitude schemes, such as, regional framework agreements, bank deposits bailins, new taxes, privatizations, capital controls, austerity measures, and statist vitalizations where banks and other corporations are given charter to operate as public private partnerships for regional economic security, regional stability and regional sustainability

    On Friday, September 20, 2013, the monetary policies of the Fed came to a screeching halt as the financial markets pivoted from risk-on to risk-off, as seen in the Market Off ETN, OFF, trading higher.

    The financial markets manifested an inflection point that marked the beginning of the end of financialization, which will come through a soon coming global credit bust and financial system breakdown, foretold in Revelation 13:3-4, whereby nannycrats will act to integrate banks of all types into government; these will be know as the government banks or gov banks for short, and in so doing there will be a great tidying up of the Banks Excess Reserves at the US Fed.

    Inasmuch as the sovereignty of nation states is failing, on the collapse of fiat money, nannycrats will increasingly meet in summits and work groups, to renounce national sovereignty, and to establish regional sovereignty, where monetary, fiscal, and economic policies will be directed by statist public private partnerships of banks, businesses, and governments.

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