Emanuel Moench

Bond yields reflect both the expected future path of short-term rates as well as term premiums. We characterize the expected path of nominal and real short rates using a unique data set comprising all available U.S. surveys of professional forecasters and obtain term premiums as the difference between observed government bond yields and survey-based expected short rates. We show that term premiums are the main drivers of bond yields, accounting for the bulk of variation in levels and nearly all of the variation in the changes. Furthermore, term premiums, not expected rates, are the dominant source of co-movement between yields at different maturities as well as the ability of the yield curve to predict real output growth. Macroeconomic factors are important drivers of term premiums, with demand shocks playing a prominent role. Our results therefore show that term premiums are a key feature of the macro-finance nexus..

We use the term structure of disagreement of professional forecasters to document a novel set of facts: (1) forecasters disagree at all horizons, including the long run; (2) the term structure of disagreement differs markedly across variables: it is downward sloping for real output growth, relatively flat for inflation, and upward sloping for the federal funds rate; (3) disagreement is time-varying at all horizons, including the long run. These new facts present a challenge to benchmark models of expectation formation based on informational frictions. We show that these models require two additional ingredients to match the entire term structure of disagreement: First, agents must disentangle low-frequency shifts in the fundamentals of the economy from short-term fluctuations. Second, agents must take into account the dynamic interactions between variables when forming forecasts. While models enriched with these features capture the observed term structure of disagreement irrespective of the source of the informational friction, they fall short at explaining the time variance of disagreement at medium- and long-term horizons. We also use the term structure of disagreement to analyze the monetary policy rule perceived by professional forecasters and show that it features a high degree of interest-rate smoothing and time variation in the intercept.

We empirically investigate predictions from alternative intermediary asset pricing theories. The theories distinguish themselves in their use of intermediary equity or leverage as pricing factors or forecasting variables. We find strong support for a parsimonious dynamic pricing model based on broker-dealer leverage as the return forecasting variable and shocks to broker-dealer leverage as a cross-sectional pricing factor. The model performs well in comparison to other intermediary asset pricing models as well as benchmark pricing models, and extends the cross-sectional results by Adrian, Etula, and Muir (2013) to a dynamic setting.

SUMMARY: This paper analyzes the predictive content of the term structure components level, slope, and curvature within a dynamic factor model of macroeconomic and interest rate data. Surprise changes of the three components are identified using sign restrictions, and their macroeconomic underpinnings are studied via impulse response analysis. The curvature factor is found to carry predictive information both about the future evolution of the yield curve and the macroeconomy. In particular, unexpected increases of the curvature factor precede a flattening of the yield curve and announce a significant decline of output more than 1 year ahead. Copyright © 2010 John Wiley & Sons, Ltd.