Report

Deconstructing the yield curve

Abstract: We introduce a novel nonparametric bootstrap for the yield curve which is agnostic to the true factor structure of interest rates. We deconstruct the yield curve into primitive objects, with weak cross-sectional and time-series dependence, that serve as building blocks for resampling the data. We analyze the properties of the bootstrap for mimicking salient features of the data and conducting valid inference. We demonstrate the benefits of our general method by revisiting the predictability of bond returns based on slow-moving fundamentals. We find that trend inflation, but not the equilibrium real rate, has predictive power for future bond returns.

Keywords: term structure of interest rates; resampling-based inference; factor models; bond risk premiums; predictive regression of bond returns;

JEL Classification: C15; C58; G10; G12;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2019-04-01

Number: 884

Note: Revised August 2024.