Determinants Of Bond Yields: An Overview of The United States Fixed Income Market

Abstract

The fixed income market of the United States is valued, as of 2021, at USD 46 trillion, almost double that of the domestic stock market, refuting common belief that stocks are a more favoured form of investment. Fixed income instruments however, are also not as secure and risk-free as was traditionally believed; they have ample scope for taking risk and earning higher returns. This paper attempts to study four main factors out of a multitude, that affect bond yields and build 5 models using Ordinary Least Squares Regression to confirm the direction and strength of these relationships. We use two types of Treasury Inflation Protected Yields (short-term and long-term) and three types of Corporate bond Yields (based on varying credit ratings) for the purpose. The influencing factors under study are inflation, policy rates and real economic growth. The paper uses data for a period of 21 years (2000-2021) and concludes its findings using econometrical techniques. We also later test our data for autocorrelation, multicollinearity and a structural break post December, 2019 owing to the pandemic. We find relationships in sync with our established a priori expectations and no structural break.