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Economic SYNOPSES
short essays and reports on the economic issues of the day
2009 ■ Number 32

What Caused Long-Term Rates to Rise?
Daniel L. Thornton, Vice President and Economic Adviser
n March 18, 2009, the Federal Open Market
reduction in real long-term rates. Hence, all of the
Committee (FOMC) announced that it would
announcement effect appears to be due to an expectation
purchase longer-term securities (Treasuries and
effect on real long-term yields. Figure 3 also shows that
mortgaged-backed securities) in an
apparent attempt to reduce longer-term
rates (i.e., to flatten the yield curve).1
Figure 1
There was an immediate announcement
Treasury Coupon Yield
effect: Longer-term yields declined draPercent
matically, by about 50 basis points. This
5.0
is shown in Figure 1, which includes the
4.5
Treasury coupon yields on March 17
4.0
and 18. Since then, however, longer3.5
term rates have risen sharply; the yield
3.0
curve is now more steeply sloped than
it was before the FOMC’s announcement.
2.5
This is also illustrated in Figure 1, which
2.0
compares the coupon yields for March 17
1.5
and 18 and June 25. As I explain in this
March 17
1.0
essay, the marked rise in longer-term
March 18
rates is reflected in a rise in both real
0.5
June 25
rates and expectations for inflation.
0
1
3
6
12
24
36
60
84
120
240
360
Figure 2 shows implied 5- and 10Maturity
in
Months
year inflation expectations—obtained
by subtracting the yields on 5- and 10Figure 2
year inflation-indexed government secuInflation Expectations (5- and 10-year)
rities from the yields on comparable
Percent
nominal coupon Treasuries—over the
2.5
period March 2 through June 25, 2009.
(The vertical line denotes March 18.)
2.0
As shown, 5- and 10-year inflation
expectations increased by about 80
1.5
basis points between March 18 and
June 25.
1.0
Figure 3 shows the estimated zerocoupon, inflation-indexed Treasury
0.5
yield curve for maturities ranging from
5-Year
10-Year
2 to 20 years for March 17, March 18,
0
and June 17, 2009, the most recent date
for which estimates are available. The
March 18 announcement effect was
associated with about a 50-basis-point
3/2/09
3/4/09
3/6/09
3/10/09
3/12/09
3/16/09
3/18/09
3/20/09
3/24/09
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3/30/09
4/1/09
4/3/09
4/7/09
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4/14/09
4/16/09
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4/24/09
4/28/09
4/30/09
5/4/09
5/6/09
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5/12/09
5/14/09
5/18/09
5/20/09
5/22/09
5/27/09
5/29/09
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6/18/09
6/22/09
6/24/09

O

Economic SYNOPSES

Federal Reserve Bank of St. Louis

2

Figure 3
Zero-Coupon Yield
Percent
3.0

2.5

2.0

1.5

1.0
March 17
March 18
June 17

0.5

0
2

4

6

8

10

12

14

16

18

20

Maturity in Months

since March 18 real interest rates have risen, except at the
shorter end of the yield curve, where they have declined.
For maturities of 10 years or longer, real long-term yields
have essentially returned to their pre-announcement level.

The marked rise in longer-term rates
is reflected in a rise in both real rates
and expectations for inflation.
Together these figures suggest that the recent rise in
long-term yields is due to heightened expectations for
inflation and a rise in real rates. For example, the nominal
yield on 10-year coupon bonds increased nearly 115 basis
points between March 18 and June 17. Over this same

period, estimates of the real rate (see Figure 3) indicate that
the real 10-year yield has increased about 50 basis points
and 10-year inflation expectations (see Figure 2) have
increased by about 60 basis points. The rise in real rates
likely reflects improved expectations about the real economy. The rise in inflation expectations likely reflects (i) the
fact that several inflation measures have risen recently and
(ii) concerns that the recent marked increase and expected
future increases in the monetary base will ultimately lead
to higher inflation.2 ■
1

See Thornton, Daniel L. “The Effect of the Fed’s Purchase of Long-Term
Treasuries on the Yield Curve.” Economic Synopses, Number 25, May 18, 2009;
http://research.stlouisfed.org/publications/es/09/ES0925.pdf.

2

See Bullard, James. “Effective Monetary Policy in a Low Interest Rate
Environment.” The Henry Thornton Lecture, Cass Business School, London,
March 24, 2009, http://www.stlouisfed.org/newsroom/speeches/2009_03_24.cfm.

Posted on July 8, 2009
Views expressed do not necessarily reflect official positions of the Federal Reserve System.

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