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Government bond term premia during the pandemic

With monetary policy interest rates at the effective lower bound (ELB) in developed economies, the conventional view is that countries should deploy their fiscal stimulus (Chadha, 2020).1 Since the start of the Covid-19 pandemic, such fiscal support came in conjunction with the continuation of the central banks’ asset purchase programmes so as to provide fiscal space, allowing governments to support the provision of services and transfers to mitigate the health and welfare impact of the shock across the society. Central bank bond purchase programmes of the type announced before and during Covid-19, such as quantitative easing (QE), have a direct effect on the liquidity of the bond market. Long-term Treasury yields can be decomposed into two components: expectations of the future path of short-term Treasury yields and a term premium. These are, respectively, the average current and expected future short-term interest rates, and the compensation investors require for bearing the risk that short-term Treasury yields will not evolve as expected (risk premium).[…]