Expected Inflation and Other Determinants of Treasury Yields

Expected Inflation and Other Determinants of Treasury Yields

  • GREGORY R. DUFFEE

Article first published online: 19th June 2018 DOI: 10.1111/jofi.12700

Abstract


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.

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