Dissecting the yield curve : the international evidence

Nominal yields can be expressed as the sum of an expectation, term premium, and convexity component, and in turn of their real and inflation counterparts. We extract these terms from the yield curve of the U.S., Euro Area, U.K., and Japan using a term structure model that explicitly captures the interrelation between yield factors and macroeconomic conditions while allowing for aggregate stochastic volatility. We find that the bulk of yield dynamics comes from short rate expectations. Term premia vary over time and increase with maturity, but account for a smaller fraction of yield level and variance than previously documented. Over time, we observe a sustained decline in short real rate expectations and significant convexity effects. With regard to yield comovement, the U.S. and U.K. generate the strongest spillovers at the long-end of the yield curve, in particular through term premia, whereas the Japanese market is the least connected