Using the Yield Curve of Russian Federal Bonds to Analyze Market Expectations

The article presents an econometric test of the expectations hypothesis for the Russian federal bond market before and after the global financial crisis, as well as in response to the transition to inflation targeting and the introduction of severe sanctions and restrictions on capital flows in 2022. The degree of correlation between current long-term interest rates and investor expectations of future short-term rates was arrived at by using seemingly unrelated regression equations (SURE), and the amount of co-directionality in the movement of long-term and future short-term interest rates was also determined. The relationship between expected values for the short-term interest rate and the long end of the yield curve is not uniform across various shorter terms. On average, future interest rates change in the same direction as the slope of the yield curve, i. e. forward rates contain some information about future changes in yields to maturity. This suggests that there is potential for the authorities to employ the term structure of interest rates as a guide to the expectations of market participants. When the coefficients are derived during episodes of economic crisis, their values indicate that market participants significantly underestimate the risk that inflation may accelerate and that monetary policy will be tightened. The reaction at the long end of the yield curve after the transition to inflation targeting indicates that expectations for the key rate in the long run are stable and that market participants remain confident about effective regulation and regard it as able to reduce and stabilize inflation in the long run.