ECB-PUBLIC

Benoît Cœuré What yield curves are

Member of the Executive Board telling us
European Central Bank

Dublin,
31 January 2018
 Rubric
US Treasury curve flattest in ten years

Bund and US Treasury slope of the yield curve

(basis points)

DE vs US slope spread 10Y vs 2Y Bund 10Y vs 2Y UST

350

300

250

200

150

100

50

-50

-100

-150

-200
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Sources: Bloomberg and ECB staff calculations.

Notes: Last observation refers to 29 January 2018.
1 www.ecb.europa.eu
ARubric
fall in the term premium is weighing on long-term yields

10-year US Treasury yield decomposition

(percentage points)

Fitted yield
Term premium
Risk-neutral yield

0.8

0.6

0.4

0.2

0.0

-0.2

-0.4

-0.6

-0.8
Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18

Sources: Federal Reserve Bank of New York and ECB staff calculations.
Notes: The term premium estimates are obtained from a five-factor, no-arbitrage term
structure model of Adrian, Crump and Mönch (2013). Last observation is for 26 January
2018.

2 www.ecb.europa.eu
 Rubric
APP likely to have triggered large net capital outflows

Breakdown of euro area net portfolio investment flows

(EUR bn; twelve-month moving sums)

Total Long-term debt securities

Equities Short-term debt securities

800
APP

600

400

200

-200

-400
2010 2011 2012 2013 2014 2015 2016 2017

Source: Haver Analytics and ECB staff calculations.

Notes: A positive (negative) number indicates net outflows (inflows) from (into) the
euro area. Equity includes investment fund shares. APP stands for Asset Purchase
Programme. The latest observation is for November 2017.
3 www.ecb.europa.eu
 Rubric
Euro area investors have become large buyers of US debt securities

Foreign net purchases of US portfolio debt securities

(USD bn; four-quarter moving sums)
Total
Euro area
Rest of the world

1200

1000

800

600

400

200

-200
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Haver Analytics and ECB staff calculations.

Notes: A positive (negative) number indicates net purchases (sales) of US debt
securities by foreign investors. The latest observation is for the third quarter of 2017.

4 www.ecb.europa.eu
 Rubric
Differences in bond returns can cause cross-border capital flows

10-year FX hedged sovereign yield for US and DE

and equivalent Japanese government bond yield
(percent)

10-year FX hedged DE sovereign yield

10-year FX hedged US sovereign yield
10-year JGB yield
1.6

1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0

-0.2

-0.4
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

Source: Bloomberg and ECB staff calculations.

Notes: Yields on US Treasuries and Bunds assumed to be hedged against movements
in Japanese Yen. Hedging costs are computed as annualized three months costs. Last
observation refers to 30 January 2018.
5 www.ecb.europa.eu
 Rubric
Spillovers from the euro area to the US increased around the APP

Spillovers between US Treasury and Bund yields

(in percent of error variance)

Spilovers from DE Bunds to US Treasuries

Spilovers from US Treasuries to DE Bunds

70

60

50

40

30

20

10

0
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

Source: Bloomberg and ECB staff calculations.

Notes: Spillover estimates are derived from the Diebold/Yilmaz (2014) methodology.
Contributions are calculated from the forecast error variance matrix inferred from generalised
identification of shocks. For example, spillovers from US Treasuries to Bunds are measured
as the share of the Bund error variance explained by movements in US Treasuries.
Last observation is for 26 January 2018. 6 www.ecb.europa.eu
 Rubric official institutions currently net sellers of US government securities
Foreign

Foreign purchases of US Treasuries and

government agency bonds
(USD bn; 12-month moving sum)
private
public

800

600

400

200

-200

-400

-600
2003 2005 2007 2009 2011 2013 2015 2017

Source: US TICS and ECB staff calculations.

Notes: Last observation is for November 2017.

7 www.ecb.europa.eu
 Rubric risk premia in the US and the euro area close to record lows
Inflation

5-10 year decomposition of breakeven 5-10 year decomposition of breakeven

inflation rates for US inflation rates for the euro area
(percent) (percent)
5-10 year ahead breakeven inflation 5-10 year ahead breakeven inflation
Inflation risk premium Inflation risk premium
Expected inflation Expected inflation

3.5 3.5

3.0 3.0

2.5 2.5

2.0 2.0

1.5 1.5

1.0 1.0

0.5 0.5

0.0 0.0

-0.5 -0.5

-1.0 -1.0
2005 2007 2009 2011 2013 2015 2017 2005 2007 2009 2011 2013 2015 2017
Source: Federal Reserve Bank of New York. Source: Thomson Reuters and ECB staff calculations.
Notes: Abrahams-Adrian-Crump-Mönch decomposition. Last observation Notes: The decomposition is based on an affine term structure model and
refers to December 2017. fitted to the euro area zero-coupon inflation linked swap curve. The
estimation method follows Joslin, Singleton and Zhu (2011). For details
please see Camba-Mendez, G. and T. Werner (2017). Last observation is
for December 2017.
8 www.ecb.europa.eu
 Rubric appear less uncertain over future inflation
Investors

Risk-neutral probability density function of euro area

inflation over the next five years

29-Jan-18 22-Jan-15

-3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0

Sources: Bloomberg, Reuters, and ECB calculations.

Note: Density functions are computed from 5-year maturity zero-coupon inflation option floors under the
assumption of risk neutrality. These “risk neutral” density functions may differ significantly from physical (or
"true") probability distributions.
9 www.ecb.europa.eu
 Rubric
Low volatility and term premia may have common underlying fundamental

US bond term premium and implied rates

volatility
5y5y OIS USD Swaption Nvol* (lhs)
bps %
10-year US Treasury term premia (rhs)
150 3.75

140 3.20

130 2.65

120 2.10

110 1.55

100 1.00

90 0.45

80 -0.10

70 -0.65

60 -1.20
2006 2008 2010 2012 2014 2016 2018
Source: Bloomberg and ECB staff calculations.
Notes: Expected volatility priced in the US swaption market (normal model). Last observation
refers to 29 January 2018.

10 www.ecb.europa.eu