Modelling Consumer Price Index Effect on 10-year US Treasury Bond Yields using Least Square Spline Approach

Julia Widiyanti; Safira Salsabila; Dwika Maya Harsanti; Dita Amelia; Marisa Rifada

doi:10.31764/jtam.v9i4.33020

Modelling Consumer Price Index Effect on 10-year US Treasury Bond Yields using Least Square Spline Approach

Julia Widiyanti, Safira Salsabila, Dwika Maya Harsanti, Dita Amelia, Marisa Rifada

Abstract

Inflation measured by the Consumer Price Index (CPI) is a critical indicator in the government bond market that directly affects the yields of long-term securities such as the 10-year US Treasury Bond. This study is an explanatory quantitative study that aims to examine the complex dynamics of this relationship using the nonparametric least square spline method. The analysis uses monthly CPI data from FRED and 10-year US Treasury bond yield data from Investing.com for the period 2013-2025. This method divides the data into simple polynomial segments that are smoothly connected at transition points (knots), enabling the modelling of nonlinear patterns without assuming an initial curve shape. The analysis results indicate that a first-degree polynomial spline model (piecewise linear) with three knots successfully represents the bond yield response to inflation shocks with R^2 = 86.48%. Model segmentation identified four regimes: (1) Post-crisis recovery phase, with a negative relationship driven by Fed monetary stimulus suppresing yields despite initial inflation emergence; (2) Policy normalization phase, with a positive relationship aligned with monetary tightening in response to moderate inflation; (3) During the COVID-19 pandemic, a negative relationship due to a surge in demand for safe-haven bonds despite rising inflation; (4) Post-pandemic, the relationship turned positive again following the Fed’s aggressive monetary tightening in response to high global inflation. These findings highlight the urgency of regime-based monitoring for investors and policymakers, while contributing concretely to SDG 8 (decent work and economic growth) through the facilitation of appropriate interest rate policies for sustainable macroeconomic stability, and supporting SDG 9 (industry, innovation, and infrastructure) through the identification of inflation patterns that strengthen shock-resistant infrastructure investment planning and financial innovation during turbulent economic transitions.

Keywords

Least Square Spline; Consumer Price Index; US 10-year Treasury Bond; Nonparametric Model; Inflation.

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DOI: https://doi.org/10.31764/jtam.v9i4.33020