Macroeconomic Uncertainty and the Distant Forward-Rate Slope
Posted: 14 Mar 2014 Last revised: 26 Jul 2018
Date Written: February 6, 2018
Over the 1990 to 2014 period, we show that the macroeconomic-uncertainty index of Jurado, Ludvigson, and Ng (2015) is a powerful empirical determinant of the slope in Treasury forward interest rates over the 10- to 30-year term-structure segment. The strong negative partial relation between macroeconomic uncertainty and the distant forward-rate slope remains reliably evident in a multivariate setting that includes expected bond yield volatility (as a control for convexity's influence), economic growth, expected inflation, and five other well-known uncertainty and risk measures. Beyond the well-known bond convexity channel for promoting a downward sloping distant forward-rate slope, our findings suggest that higher macroeconomic uncertainty can promote a more downward slope in distant forward rates through a hedge channel in the sense of Campbell, Sunderam, and Viceira (2017). Consistent with the hypothesized hedge channel, we also document striking cross-sectional variation in how bond returns are related to macroeconomic uncertainty, both across mid- and long-horizon T-bonds and across high and low credit-risk corporate bonds.
Keywords: Term Structure, Forward Interest Rates, Macroeconomic Risk, Term Risk Premia
JEL Classification: G12
Suggested Citation: Suggested Citation