What factors influence the yield curve?

The shape and dynamics of the yield curve provide useful information in the analysis of current economic and financial developments, and market expectations. This article describes the key theoretical factors affecting the yield curve and examines their role in the developments in advanced and emerging markets seen in recent years. Our findings show that the common component of term premia and interest rate expectations of emerging countries co-move with corresponding factors observed in the United States. Of these two components, the term premium appears to be affected by global risk shocks. Concerns related to the Fed’s tapering of its QE3 programme were reflected markedly in the term premia of emerging markets and, to some extent, even had an upward impact on rate expectations. In the Hungarian context, in addition to analysing co-movement with international factors, we focus on the potential of the yield curve in the monitoring of domestic base rate expectations.