Term structure modeling with supply factors and the Federal Reserve's large-scale asset purchase programs

Abstract

This paper estimates an arbitrage-free term structure model with both observable yield factors and Treasury and agency MBS supply factors, and uses it to evaluate the term premium effects of the Federal Reserve's large-scale asset purchase programs. Our estimates show that the first and second large-scale asset purchase programs and the maturity extension program jointly reduced the ten-year Treasury yield by about 100 basis points.