Yield curve and macroeconomy interaction: evidence from the non-parametric functional lagged regression approach

TL;DR

This paper models the US Treasury yield curve as a sparsely observed functional time series and uses non-parametric methods to analyze its dependence on macroeconomic variables, confirming known effects.

Contribution

It introduces a non-parametric functional lagged regression approach to analyze yield curve and macroeconomy interactions, extending prior parametric studies.

Findings

Federal funds rate strongly impacts short-term yields.

Inflation moderately affects long-term yields.

Non-parametric results align with previous parametric findings.

Abstract

Viewing a yield curve as a sparse collection of measurements on a latent continuous random function allows us to model it statistically as a sparsely observed functional time series. Doing so, we use the state-of-the-art methods in non-parametric statistical inference for sparsely observed functional time series to analyse the lagged regression dependence of the US Treasury yield curve on US macroeconomic variables. Our non-parametric analysis confirms previous findings established under parametric assumptions, namely a strong impact of the federal funds rate on the short end of the yield curve and a moderate effect of the annual inflation on the longer end of the yield curve.