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When Long-Run Trends Are Unknown: Bond Pricing Implications

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Abstract

We propose a macro-finance model in which inflation, growth, and the policy rate are driven by unobservable long-run trends and transitory cycles that investors must infer from aggregate data. Their subjective estimates of these trends, and the uncertainty surrounding them, are priced into the Treasury yield curve in a tractable way through both interest rate expectations and bond risk premia. Empirical estimates reveal an upward smooth trend in the long-run real interest rate (r-star) until the 1980s, and large investor uncertainty with confidence bands on as wide as 3.4 percentage points, contrasting with the volatile rate implied by perfect information models.

Suggested Citation

  • Borel Ahonon & Guillaume Roussellet, 2026. "When Long-Run Trends Are Unknown: Bond Pricing Implications," Staff Reports 1187, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:102914
    DOI: 10.59576/sr.1187
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    References listed on IDEAS

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    1. Michael T. Kiley, 2020. "What Can the Data Tell Us about the Equilibrium Real Interest Rate?," International Journal of Central Banking, International Journal of Central Banking, vol. 16(3), pages 181-209, June.
    2. Sophia Cho & John C. Williams, 2025. "Are Financial Markets Good Predictors of R‑Star?," Liberty Street Economics 20250825, Federal Reserve Bank of New York.
    3. Monika Piazzesi & Martin Schneider, 2009. "Trend and cycle in bond premia," Staff Report 424, Federal Reserve Bank of Minneapolis.
    4. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
    5. Daniel Andrei & Michael Hasler & Alexandre Jeanneret, 2019. "Asset Pricing with Persistence Risk," The Review of Financial Studies, Society for Financial Studies, vol. 32(7), pages 2809-2849.
    6. Kim, Don H. & Orphanides, Athanasios, 2012. "Term Structure Estimation with Survey Data on Interest Rate Forecasts," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(1), pages 241-272, February.
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    Keywords

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    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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