A Cointegration Analysis of Treasury Bill Yields.

This paper shows that yields to maturity of U.S. Treasury bills are cointegrated and that, during periods when the Federal Reserve specifically targeted short-term interest rates, the spreads between yields of different maturity define the cointegrating vectors. This cointegrating relationship implies that a single nonstationary common factor underlies the time-series behavior of each yield to maturity and that risk premia are stationary. An error-correction model that uses spreads as the error-correction terms is unstable over the Federal Reserve's policy regime changes, but a model using post 1982 data is stable and is shown to be useful for forecasting changes in yields. Copyright 1992 by MIT Press.