The Term Structure of Expectations and Bond Yields

88 Pages Posted: 31 May 2016 Last revised: 11 Apr 2018

See all articles by Richard K. Crump

Richard K. Crump

Federal Reserve Banks - Federal Reserve Bank of New York

Stefano Eusepi

University of Texas at Austin

Emanuel Moench

Deutsche Bundesbank; Goethe University Frankfurt - Department of Money and Macroeconomics

Date Written: April 2018

Abstract

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

Crump, Richard K. and Eusepi, Stefano and Moench, Emanuel, The Term Structure of Expectations and Bond Yields (April 2018). FRB of NY Staff Report No. 775, Available at SSRN: https://ssrn.com/abstract=2786193

Richard K. Crump (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Stefano Eusepi

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Emanuel Moench

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
+49 69 95662312 (Phone)

HOME PAGE: http://https://www.bundesbank.de/en/emanuel-moench

Goethe University Frankfurt - Department of Money and Macroeconomics ( email )

Germany

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