Interest rate spillovers from the United States: expectations, term premia and macro-financial vulnerabilities

BIS Working Papers  |  No 814  | 
27 September 2019


The close co-movement between long-term interest rates internationally has been well documented. However, there is only limited understanding about how changes in the individual components of long-term rates - expectations of real rates and inflation, and the term premia - are transmitted internationally. The relative strength of the spillovers from the different components could differ. While the distinction is not clear cut, unconventional monetary policy in the form of quantitative easing is typically considered to work on the yield curve mainly through term premia, and conventional interest rate policy and forward guidance mainly through expectations. The spillovers of unconventional and conventional policies could, in turn, differ in magnitude, with different effects on monetary conditions in the "receiving" economies.


We estimate spillovers from real rate and inflation expectations and term premia in the United States on long-term interest rates abroad, using monthly panel data for a large number of advanced and emerging economies (EMEs). We also study how macro-financial vulnerabilities in emerging economies affect these spillovers. We consider macro-financial indicators comprising the current account balance, the headline fiscal balance, the stock of total external debt, as well as outstanding portfolio debt and equity liabilities.


We find that interest rate spillovers tend to be large, and that spillovers from all four components of long-term rates in the United States are significant. However, we also find that there are differences in how movements in the yield curve components affect long-term rates in the different economies. In particular, changes in US term premia have a stronger impact on yields in advanced economies than in EMEs. In EMEs, we find that spillovers to domestic long-term rates from the US expectations components are more sizeable than those from the US term premia. We also find that spillovers from US yields tend to be larger when a receiving EME displays greater macro-financial vulnerabilities. In particular, interest rate spillovers driven by shifts in the US inflation risk premium are sensitive to EME vulnerabilities.


We analyse how movements in the components of sovereign bond yields in the United States affect long-term rates in 10 advanced and 21 emerging economies. The paper documents significant global spillovers from both the expectations and term premia components of long-term rates in the United States. We find that spillovers to domestic long-term rates in emerging economies from the US expectations components tend to be more sizeable than those from the US term premia. Finally, spillovers from US term premia are larger when an emerging economy displays greater macro-financial vulnerabilities.

JEL codes: E52, E43, F42, F65.

Keywords: interest rate spillovers, term premia, emerging economies