Discussion of Hanson, Lucca, and Wright, “Interest Rate Conundrums in the Twenty-First Century” Eric T. Swanson University of California, Irvine ASSA Meetings Philadelphia January 6, 2018

What This Paper Does 1. Empirical fact: Excess sensitivity of long-term yields at low (semi- annual or annual) frequencies is much lower after 2000 than it was before But excess sensitivity of long-term yields at high (daily) frequencies has not declined; in fact, it’s increased since 2000 2. Explanation for empirical fact (discussed shortly)

Empirical Fact

Explanation for Empirical Fact Simple model where supply of long-term bonds affects long-term yields (Vayanos-Vila 2009, Greenwood-Vayanos 2014) Net supply of long-term bonds is positively correlated with changes in short-term interest rates reaching for yield (Hanson-Stein 2015) mortgage refinancing (MBS convexity) other (behavioral) stories This creates comovement between long- and short-term yields Slow-moving capital makes high-frequency effects bigger than at low frequency Story: positive correlation in #2 has increased since 2000; serial correlation of short-term interest rates has fallen

Comment 1: I Like the Model Simple model where supply of long-term bonds affects long-term yields (Vayanos-Vila 2009, Greenwood-Vayanos 2014) Net supply of long-term bonds is positively correlated with changes in short-term interest rates reaching for yield (Hanson-Stein 2015) mortgage refinancing (MBS convexity) other (behavioral) stories This creates comovement between long- and short-term yields Slow-moving capital makes high-frequency effects bigger than at low frequency Story: positive correlation in #2 has increased since 2000; serial correlation of short-term interest rates has fallen

Comment 1: I Like the Model, But … Simple model where supply of long-term bonds affects long-term yields (Vayanos-Vila 2009, Greenwood-Vayanos 2014) Net supply of long-term bonds is positively correlated with changes in short-term interest rates reaching for yield (Hanson-Stein 2015) mortgage refinancing (MBS convexity) other (behavioral) stories This creates comovement between long- and short-term yields Slow-moving capital makes high-frequency effects bigger than at low frequency Story: positive correlation in #2 has increased since 2000; serial correlation of short-term interest rates has fallen

Comment 1: I Like the Model Model provides good explanation for why excess sensitivity is larger at high frequency than at lower frequency: See also Altavilla, Giannone, and Modugno (2017 JME)

Comment 1: I Like the Model, But … I’m not convinced by part #4 of the model: Is the net supply of long-term bonds (reaching for yield, mortgage refinancing) more correlated with short-term interest rates after 2000 than it was before? Reaching for yield: accounting rules for banks’ bond holdings haven’t changed Mortgage refinancing: are people more likely to refinance after an interest rate cut than they were before? (maybe from 2000-2007, but not 2008-2015) Behavioral explanations: why would these explanations be stronger after 2000 than before? Authors should try to provide some evidence here

Comment 2: How Robust is the Empirical Fact? Excess sensitivity at monthly frequency is not any lower after 2000 Slow-moving capital examples in Duffie (2010) suggest a month is long enough for capital to move There are very few annual observations from 2000-2015 (and the ZLB period may be unusual)

Comment 2: How Robust is the Empirical Fact? The empirical fact is weaker in the UK and Germany: UK Germany

Comment 2: How Robust is the Empirical Fact? Authors should focus the empirical analysis on forward interest rates rather than bond yields Makes the empirical fact more clear Extend sample through end of 2017 Need longer sample, and 2016-2017 is largely free of the ZLB Why is excess sensitivity still present at the monthly frequency? Why is excess sensitivity still present at low frequencies in Germany, UK?

Comment 3: Inflation Risk One of the main points of Gurkaynak, Sack, Swanson (2005) was that excess sensitivity in response to FOMC announcements is different:

Comment 3: Inflation Risk Gurkaynak, Levin, Swanson (2010) show a very similar pattern in the UK in the 1990s: Forward inflation compensation, 9 to 10yrs (bp) Monetary policy announcement surprise (bp)

Comment 3: Inflation Risk The empirical excess sensitivity fact in the present paper is unconditional, reduced-form, average effect But as found by Gurkaynak-Sack-Swanson (2005) and others, excess sensitivity for monetary policy surprises is different (opposite) Suggests some role for inflation expectations and/or inflation risk The paper here dismisses this as “not being plausible in the 1990s or 2000s”, but …

Comment 3: Inflation Risk Long-term bond yields in the 1990s were very high, volatile:

Comment 3: Inflation Risk Inflation expectations and/or inflation risk also seem to play a role in this paper’s results: US UK

Comment 3: Inflation Risk The paper’s model of excess sensitivity only explains positive comovement between short- and long-term interest rates Can the authors explain the negative response of long- term interest rates to monetary policy announcements? Also, what about the significant response of inflation compensation (IC) to short-term interest rates?

Summary of Comments and Suggestions The empirical fact (reduced excess sensitivity at low frequencies after 2000) is not as convincing as it might be Authors should work on this, extend sample, etc. I like the model, but need more convincing that bond net supply has become more correlated with short-term interest rates There is evidence that inflation risk plays some role in the results Can the model be reconciled with this? FOMC announcements produce an opposite reaction. Can the model be reconciled with that?