International Interest Rate Linkages in the Term Structure

This paper considers one aspect of the relationship between returns on long-term bonds denominated in Canadian dollars issued by the Canadian federal government and long-term bonds denominated in American dollars issued by the American federal government. The difference between a component of the term premium in the Canadian dollar term structure and the same component of the term premium in the American dollar term structure is measured at three terms to maturity. The measurement compares ex ante excess returns earned on Canadian dollar long-term bonds and excess returns earned on American dollar long-term bonds. The evidence supports the existence of currency-specific term premia which vary over time.