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The Yield of Ten-Year T-Bonds: Stumbling Towards a 'Good' Forecast

  • Weißbach, Rafael
  • Ponyatovskyy, Vladyslav
  • Zimmermann, Guido
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    Due to their status as "the" benchmark yield for the world's largest government bond market and its importance for US monetary policy, the interest in a "good" forecast of the constant maturity yield of the 10-year U.S. Treasury bond ("T-bond yields") is immense. This paper assesses three univariate time series models for forecasting the yield of T-bonds: It shows that a simple SETAR model proves to be superior to the random walk and an ARMA model. However, dividing the sample of bond yields, dating from 1962 to 2005, into a training sample and a test sample reveals the forecast to be biased. A new bias-corrected version is developed and forecasts for March 2005 to February 2006 are presented. In addition to point estimates forecast limits are also given.

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    Paper provided by Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen in its series Technical Reports with number 2006,50.

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    Date of creation: 2006
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    Handle: RePEc:zbw:sfb475:200650
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    1. Michael J. Fleming & Eli M. Remolona, 1997. "What moves the bond market?," Research Paper 9706, Federal Reserve Bank of New York.
    2. Glenn D. Rudebusch & Eric T. Swanson & Tao Wu, 2006. "The Bond Yield "Conundrum" from a Macro-Finance Perspective," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 24(S1), pages 83-109, December.
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    5. Marvin Goodfriend, 1993. "Interest rate policy and the inflation scare problem: 1979-1992," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 1-24.
    6. Kevin L. Kliesen, 2005. "Battle at bond bluff: forecasters vs. financial markets," National Economic Trends, Federal Reserve Bank of St. Louis, issue Jun.
    7. Massimo Guidolin, 2005. "Is the bond market irrational?," Monetary Trends, Federal Reserve Bank of St. Louis, issue Jul.
    8. Zeileis, Achim & Leisch, Friedrich & Kleiber, Christian & Hornik, Kurt, 2002. "Monitoring structural change in dynamic econometric models," Technical Reports 2002,07, Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen.
    9. Mathias Hoffmann & Ronald MacDonald, 2006. "A Re-examination of the link between Real Exchange Rates and Real Interest Rate Differentials," Working Papers 2007_36, Business School - Economics, University of Glasgow.
    10. David C. Wheelock, 2005. "Has the bond market forgotten oil?," Monetary Trends, Federal Reserve Bank of St. Louis, issue May.
    11. Tao Wu, 2005. "The long-term interest rate conundrum: not unraveled yet?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue apr29.
    12. Michael J. Fleming, 2000. "The benchmark U.S. Treasury market: recent performance and possible alternatives," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 129-145.
    13. Michael D. Bordo & William G. Dewald, 2001. "Bond Market Inflation Expectations in Industrial Countries: Historical Comparisons," NBER Working Papers 8582, National Bureau of Economic Research, Inc.
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