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Term Premia: Models and Some Stylised Facts

We review methods and models for estimating term premia on long-term government bonds. We then use these models to estimate term premia on US and euro area bonds and explore their recent behaviour. Although the models produce different estimates for the level of term premia, they largely concur on the trends and dynamics. While low (and sometimes negative) term premia have helped to keep yields unusually low, recent yield movements have tended to reflect shifts in expected short-term rates rather than in the premia. We find that co-movements in real term premia (rather than inflation risk premia or expected rates) have contributed to co-movements between yields in the United States and the euro area.