Macroeconomic Disagreement in Treasury Yields

I estimate a term structure model of Treasury yields in which traders’ information about macroeconomic conditions is dispersed. Bond yields and inflation forecasts identify properties of traders’ information. I find that prices are moderately informative about economic fundamentals, but more informative about policy and others’ beliefs. Nevertheless, beliefs about the macroeconomy are estimated to be quite heterogeneous. Over the sample period, dispersed beliefs directly added an average of 60 basis points to ten year yields, mostly attribute to disagreement about the Federal Reserve’s inflation target. Accounting for learning and belief heterogeneity dramatically reduces the magnitude and volatility of risk premia relative to estimates that assume full information.