We analyse the volatility of the 2-year U.S. Treasury bond from 1994 to 2024, with particular focus on the shock of the Covid-19 pandemic, which triggered the most significant global inflationary surge in four decades. This led the Federal Reserve to raise interest rates more aggressively than ever before, reaching the highest levels in two decades. By correlating the conditional variance of long-term interest rates with macroeconomic conditions using APARCH and DCC-GARCH models, we were able to assess the significance of asymmetric shocks on volatility, the feedback between the 2-year yield, unemployment rate, and expected inflation, and the spillover effect between Treasury volatility and macroeconomic variables volatility. The findings align with the Fed’s dual mandate and are consistent with theoretical literature linking long-term interest rates to market expectations and the information content in the term structure of interest rates. We believe this study provides practical insights for risk management and investment strategies, potentially helping investors more effectively model the asymmetries in volatility persistence, the interest rate risks driven by economic conditions, and downside risks in portfolio management.

--

Volatility,US treasury yields,APARCH,DCC-GARCH,Asymmetric shocks