Two of my favorite economists, Bilkent University Professor Refet Gurkaynak and Johns Hopkins University Professor Jonathan Wright, have a nice new paper in which they survey macroeconomic theories of the term structure of interest rates. As an unusual digital supplement to their paper, they put together a movie in which you can watch the arbitrage glue that normally holds markets together start to fail as financial markets literally fell apart at the end of 2008.
What you’re watching in the movie are the yields to maturity (vertical axis) of different Treasury securities as a function of time to maturity (horizontal axis) as we move from one day to another over the last two years. We start out 2008 with securities of similar maturities offering very similar yields, as of course standard no-arbitrage finance theory says they should. But watch that nice relation fall apart as yields (and everything else) started tumbling down at the end of 2008. Gurkaynak and Wright have a discussion of this on page 39 of their paper.
Click here to watch the movie.