Long-term U.S. government bond yields have trended down for more than two decades, but identifying the source of this decline is difficult. A new methodology suggests that reductions in long-run expectations of inflation and inflation-adjusted interest rates have played a significant role in the secular decline in yields. In contrast, standard statistical finance methods appear to overemphasize the effects of lower risk premiums and reduced uncertainty about future inflation. During the past year, yields on long-term U.S. Treasury securities have fallen to historically low levels. In a recent speech at the Federal Reserve Bank of San Francisco, Federal Reserve Chairman Bernanke said these low yields partly reflect cyclical factors, including the slow pace of economic recovery, modest inflation rates, and accommodative monetary policy (Bernanke 2013). However, in addition to cyclical variation, yields have registered a longer-run decline. Indeed, from 1990 to 2012, 10-year U.S. Treasury yields fell fairly steadily from just over 8 % to around 2%. Identifying the sources of this long-run decline in interest rates is of great interest to monetary policymakers, bond investors, and other financial market participants. But it is quite difficult to do. Standard statistical finance methods as employed, for example, in Wright (2011), suggest that th
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