Monday, March 27, 2017

U.S. Term Premia and U.S. Economy

An economics/financial writer recently expressed surprise that U.S. five year term premia nearly matches U.S. 5 year breakeven inflation.  To me, it seemed obvious, in this low interest, low growth economy, that the above would be true.  In 2015, Bernanke commented on how low term premia appears to be holding down  interest rates.  In the March 2017 New York Federal Reserve Bank Snapshot of the U. S. Economy, on page 14, you can see the term premia of the U.S. Treasury ten year nearly matches the 5-10 year inflation risk premia.  This is what one would expect in a period of low growth, no significantly surprising political instability in the world, and no financial instability.

I find nothing wrong in my disagreement with the writer, because he pointed to data, expressed his opinions, and ended up asking questions.  The fact that I disagreed caused me, as is my habit, to look and see if I was right or wrong.

Here is a good compilation of how the New York Federal Reserve Bank calculates term premia how it has been used and evaluated.

I have, in the past, pointed readers to the New York Federal Reserve Bank U. S. Economy in a Snapshot monthly report.  Put it in your bookmarks to review monthly. 

In New York Federal Reserve's analysis of the last 15 bond market sell offs, it immediately struck me that the last sell off in July 2013 was consistent with the Cyprus "banking" crisis.  As a country which is a member of the EMU and uses the euro as its currency, Cyprus saw its banks closed, deposits seized or taxed to fund a bailout, and monetary capital controls imposed to keep money in the country.  The bailout terms, banks resolution, and capital controls were imposed on Cyprus, a sovereign nation, by the EMU.

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