Measuring Bond Investors’ Risk Appetite Using the Interest Rate Term Structure

Abstract

The distribution of term premia includes additional information beyond that contained in the traditional three-parameter decomposition of the Treasury yield curve. The author finds that the position and the size of the curvature hump are both important. A yield curve hump positioned at longer maturities appears to be consistent with lengthier time horizons of investors and with more risk-seeking behavior. The author finds that this new parameter Granger drives both future US economic activity and bond returns.

TOPICS: Fixed income and structured finance, portfolio management/multi-asset allocation, fixed-income portfolio management, statistical methods