Home  Journals  Financial Analytics: Science and Experience  38(272) - 2015 October

Term structure of government bond interest rates

Vol. 8, Iss. 38, OCTOBER 2015

Article PDF Version

Received: 3 September 2015

Accepted: 11 September 2015

Available online: 24 October 2015

Subject Heading: FINANCIAL INSTRUMENTS

JEL Classification: 

Pages: 42-52

Subject The paper proves the influence of inflation expectations and inflation uncertainty on the form of zero-coupon yield curve of government bonds, and analyzes the term structure of government bond interest rates over 2014-2015.
     Objectives The study aims to describe the possibility of applying the theory of inflation expectations to forecasting the government bond yields in the Russian economy.
     Methods I analyze how the hypotheses describing the term structure of government bonds can be used in Russia.
     Results The low level of inflation uncertainty explains the upward slope of the yield curve of government bonds, which is typical of stable economy. The periods, when investors lose confidence in their forecasting models of inflation expectations and expectations of consumption growth rates, coincide with periods when prices for assets (including government bonds) are dropping. This means that government bonds are not an effective tool to hedge against both the risks of economic stagnation and the Knightian uncertainty risks.
     Conclusions and Relevance The practical significance of the work is in the structuring of the existing knowledge on applicability of hypotheses for predicting the term structure of interest rates in Russia. Since the government bond market largely determines the level of interest rates in other segments of the debt market, this model allows a better evaluating the market sentiment before the government bond issuing. The paper reveals the dynamics and relationship between the debt market indicators in 2015, which changed significantly against the pre-crisis values.

Keywords: zero-coupon yield curve, term structure, interest rates, devaluation, inflation-linked bonds

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