The Term Structure of Expectations and Bond Yields
88 Pages Posted: 31 May 2016 Last revised: 11 Apr 2018
Date Written: April 2018
Bond yields can be decomposed into expected short rates and term premiums. We directly measure the former using all available U.S. professional forecasts and obtain the latter as the difference between bond yields and survey-based expected short rates. While the behavior of nominal and real short rate expectations is consistent with standard macroeconomic theory, term premiums account for the bulk of the cross-sectional and time series variation in yields. They also largely explain the yield curve's reaction to a host of structural economic shocks. This dramatic failure of the expectations hypothesis highlights the importance of term premiums for macro-financial transmission.
Keywords: term premiums, expectations formation, survey forecasts, monetary policy, business cycle fluctuations
JEL Classification: D84, E44, G12
Suggested Citation: Suggested Citation