Extracting Risk Free Interest Rate Expectations in a Less Liquid Government Bond Markets

This paper shows that in a less liquid government bond market, filtering term premia through a regression-based Adrian, Crump & Moench (ACM) framework yields risk neutral short rate expectations that match, and often rival, the accuracy of Survey of Professional Forecasters (SPF). Using monthly zero-coupon yields, we extract a model consistent risk free yield curve whose implied forward rates exhibit forecasting performance comparable to SPF paths across horizons up to three years. Crucially, these expectations can be generated daily, providing far higher frequency information than SPF’s quarterly releases. We find that term premia are negligible at the short end but rise with maturity, and that the level factor—despite capturing most yield variance-does not command a price of risk. Cointegration tests indicate that SPF forecasts contain no incremental information beyond the filtered curve. The results highlight a practical advantage: once premia are removed, the yield curve becomes a reliable, high frequency source of monetary policy expectations suitable for policy analysis and market surveillance.