Abstract/Summary

In this thesis, I study various determinants of interest rates. In the first chapter, I explore the empirical relationship between interest rates and debt supply expectations derived from Treasury press releases in Italy and Germany. I find that news on expected government bond supply affects bond yields, but only when news is an accurate reflection of future supply. Estimates obtained from a macro term-structure model confirm that accurate expected supply is a significant factor in the time-variation of bonds’ risk premia. In the second empirical chapter, I study the conditional distribution of interest rates. I focus on the changes in short-term interest rate expectations and term premia in the United States, United Kingdom and Germany. A common macroeconomic factor has an asymmetric effect on short-term interest rate expectations, as it shows in- and out-of-sample predictive ability above yield-based factors for significant negative changes in future expected rates caused by a sizable easing in monetary policy. A deterioration in this common factor affects points to the much stronger time variation of downside risk for expected rates compared with upside risk. This finding contradicts the view that monetary policy easings during crisis periods come as a surprise, while a tightening in monetary policy during a business cycle upswing is more predictable. In the third empirical chapter, I document the fiscal policy developments in the main euro area economies over the last two decades and highlight the dramatic changes triggered by the COVID-19 pandemic. In this context, I analyse how euro area yield curves responded to COVID-19-related expectations of fiscal expansion. Specifically, I show how fiscal constraints may affect interest rates and how an upward pressure on country-specific sovereign yields caused by higher debt levels could compromise fiscal and financial stability in the long term.