Greenspan once called long-term treasury yield's continued downtrend despite his multiple rate hikes a "conundrum."

The Fed has research on what is often called "Greenspan's Bond Yield Conundrum" on their site:


The consensus view on the matter, according to the Fed, was this 'conundrum' was already thus in the late 1980s when the Federal Funds Rate became the Fed's policy instrument. When news of meaningful macro conditions came out, the bond market would react but the FFR was adjusted on a discretionary basis. Effectively, the relationship between the FFR and 10-year treasury yields broke down.

In fact, we can see divergence of the two series long before the mid 2000's when Greenspan put forth the conundrum:

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There were other theories submitted over the years as well, but, if we are to take the Fed's word for it, the "Federal Rate Targeting Hypothesis" as described above is the front-runner. As the linked research shows, a similar structural break with long-term bond yields was observed in other countries around the times they began practicing interest rate targeting.


Why would Greenspan assume that hiking the FFR would have any impact on long-term treasury yields? After all, even decades earlier, it's hard to imagine that hiking FFR (which is an overnight rate) would do anything to term premiums.

  • $\begingroup$ If you eyeball that chart, it looks a lot like the FFR impacts long term yields, especially prior to 2000. Also, the general view at this time was that all yields are indirectly affected by the FED (which is still true, even if maybe a lot less than expected earlier). After all, all financing starts with the FED. $\endgroup$
    – Alex
    Jan 31, 2022 at 17:37


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