The Natural Rate of Interest and Bond Returns

35 Pages Posted: 9 Aug 2017

Date Written: April 24, 2017


A growing literature argues that slower output growth is one of the main contributing factors to the fall in the natural rate of interest. Consistent with this evidence, we show empirically that real GDP growth is a major driver of the nominal yield curve. Specifically, the rate of economic growth constitutes a macroeconomic anchor that characterizes the path of the real short rate and influences the expectations hypothesis component embedded in bond yields. As a result, including growth data in canonical yield-curve models delivers significant gains in the predictability of bond excess returns in the United States and seven other developed economies.

Keywords: Natural Rate of Interest, Potential Output, Term Premia, Expectations Hypothesis, International Bond Returns

JEL Classification: E43, E52, G12, G15

Suggested Citation

Garg, Ashish and Mazzoleni, Michele, The Natural Rate of Interest and Bond Returns (April 24, 2017). Available at SSRN: or

Ashish Garg

Research Affiliates LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

Michele Mazzoleni (Contact Author)

STRS Ohio ( email )

United States

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