I study the yield curve dynamics in a general equilibrium model with financial intermediaries facing financing constraints. When constraints bind, intermediaries reallocate their portfolios, causing deadweight losses in aggregate consumption, thus affecting savers’ marginal utility. Because the yield curve is a forecast of marginal utility, intermediaries’ constraints show up, via general equilibrium forces, in long-term yields. I show that the mechanism connecting intermediaries’ constraints and long-term yields produces highly nonlinear interest rate dynamics and a positive real term premium in equilibrium. I extend the analysis to the nominal yield curve using a simple Taylor rule.

I propose a general equilibrium model with heterogeneous investors to explain the key properties of the U.S. real and nominal term structure of interest rates. I find that differences in investors' elasticities of intertemporal substitution are critical in accounting for the dynamics of nominal and real yields. The nominal term structure is driven primarily by real shocks so that it can be upward sloping regardless of the correlation between nominal and real shocks.

Premiums on U.S. sovereign credit default swaps (CDS) have risen to persistently elevated levels since the financial crisis. We examine whether these premiums reflect the probability of a fiscal default—a state in which a balanced budget can no longer be restored by raising taxes or eroding the real value of debt by increasing inflation. We develop an equilibrium macrofinance model in which the fiscal and monetary policy stances jointly endogenously determine nominal debt, taxes, inflation, and growth. We show that the CDS premiums reflect the endogenous risk‐adjusted probabilities of fiscal default. The calibrated model is consistent with elevated levels of CDS premiums but leaves dynamic implications quantitatively unresolved.