Yield Curve Momentum

58 Pages Posted: 18 Nov 2021

Date Written: November 16, 2021

Abstract

I analyze time series momentum along the Treasury term structure. Past bond returns predict future returns both due to autocorrelation in bond risk premia and because unexpected bond return shocks increase the premium. Yield curve momentum is primarily due to autocorrelation in yield changes rather than autocorrelation in bond carry and can largely be captured using a single bond return or yield change factor. Because yield changes are partly induced by changes in the federal funds rate, yield curve momentum is related to post-FOMC announcement drift. The momentum factor is unspanned by the information in the term structure today and is hence inconsistent with standard term structure, macrofinance and behavioral models. I argue that the results are consistent with a model with unpriced longer term dependencies.

Keywords: bond risk premia, time series momentum, term structure models, post-FOMC announcement drift

JEL Classification: G12, E43, E47

Suggested Citation

Sihvonen, Markus, Yield Curve Momentum (November 16, 2021). Available at SSRN: https://ssrn.com/abstract=3965229 or http://dx.doi.org/10.2139/ssrn.3965229

Markus Sihvonen (Contact Author)

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

HOME PAGE: http://sites.google.com/site/mesihvonen/

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