Expected Inflation and Other Determinants of Treasury Yields

Shocks to nominal bond yields consist of news about expected future inflation, expected future real short rates, and expected excess returns—all over the bond's life. I estimate the magnitude of the first component for short- and long-maturity Treasury bonds. At a quarterly frequency, variances...

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Bibliographic Details
Published in:The Journal of finance (New York) 2018-10, Vol.73 (5), p.2139-2180
Main Author: DUFFEE, GREGORY R.
Format: Article
Language:English
Subjects:
Dynamic models
Economic models
Inflation
Maturity
News
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Summary:Shocks to nominal bond yields consist of news about expected future inflation, expected future real short rates, and expected excess returns—all over the bond's life. I estimate the magnitude of the first component for short- and long-maturity Treasury bonds. At a quarterly frequency, variances of news about expected inflation account for between 10% to 20% of variances of yield shocks. Standard dynamic models with long-run risk imply variance ratios close to 1. Habit formation models fare somewhat better. The magnitudes of shocks to real rates and expected excess returns cannot be determined reliably.
ISSN:0022-1082
1540-6261
DOI:10.1111/jofi.12700