Staff Reports
The Term Structure of Expectations and Bond Yields
May 2016 Number 775
Revised April 2018
JEL classification: D84, E44, G12

Authors: Richard Crump, Stefano Eusepi, and Emanuel Moench

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.

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