The contribution of us bond demand to the us bond yield conundrum of 2004 to 2007: an empirical investigation
Date
2011-12-12Author(s)
Goda, Thomas
Lysandrou, Photis
Stewart, Chris
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Although the federal funds rate started rising from mid-2004 US long term rates
continued to fall. A likely contributory factor to this conundrum was the
contemporaneous increase in US bond demand. Using ARDL-based models,
which accommodate structural breaks, this paper estimates the impact of demand
on US bond yields in the conundrum period. This impact is shown to have been
everywhere significantly negative. The fact that our model fully explains the bond
yield conundrum gives support to the hypothesis that the US CDO market was
rapidly expanded before 2007 chiefly to absorb the overspill of global demand for
safe assets
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