Causal Slaving of the U.S. Treasury Bond Yield Antibubble by the Stock Market Antibubble of August 2000

TL;DR

This paper demonstrates the existence of an antibubble in U.S. Treasury yields post-2000 using LPPL analysis, revealing a causal influence chain from the stock market to long-term bond yields, suggesting the Fed is 'causally slaved' to stock market dynamics.

Contribution

It introduces a novel application of LPPL to bond yields and provides evidence of a causal chain linking stock market behavior to bond yield movements, highlighting the Fed's response to market signals.

Findings

Evidence of an antibubble in yields since October 2000

Strong causality from stock market to long-term yields

The Fed appears 'causally slaved' to stock market trends

Abstract

Using the descriptive method of log-periodic power laws (LPPL) based on a theory of behavioral herding, we use a battery of parametric and non-parametric tests to demonstrate the existence of an antibubble in the yields with maturities larger than 1 year since October 2000. The concept of ``antibubble'' describes the existence of a specific LPPL pattern that is thought to reflect collective herding effects. From the dependence of the parameters of the LPPL formula as a function of yield maturities and using lagged cross-correlation calculations between the S&P 500 and bond yields, we find strong evidence for the following causality: Stock Market $\to$ Fed Reserve (Federal funds rate) $\to$ short-term yields $\to$ long-term yields (as well as a direct and instantaneous influence of the stock market on the long-term yields). Our interpretation is that the FRB is ``causally slaved'' to the stock market (at least for the studied period), because the later is (taken as) a proxy for the present and future health of the economy.