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Economic-state variation in uncertainty-yield dynamics

Christopher T. Stivers, PhD Dubofsky, D. Connolly, R.
The Review of Asset Pricing Studies. November 12, 2020

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We show there is a much stronger negative, dynamic relation between changes in economic uncertainty and Treasury yields over weaker economic times since at least 1990. We document this economic-state variation in uncertainty-yield dynamics for weekly and monthly change horizons, for nominal yields and real-yield proxies, for multiple economic-state identification methods, and for different economic uncertainty metrics. We present additional findings that suggest short-term fluctuations in precautionary-savings and consumption-smoothing forces are more impactful on interest rate dynamics during weaker economic times, especially relying on surveys of expected economic growth and inflation.