Capturing the Interaction of Trend, Cycle, Expectations and Risk Premia in the US Term Structure

This paper deals with simultaneous interactions between the determinants of the US yield curve. For this purpose, we derive a multivariate unobserved components model based on the expectation hypothesis. The influencing factors of the term structure that arise from the structural model are a common stochastic trend, the cyclical part of the short rate and maturity-dependent term premiums in the longer rates. We establish a significant influence of both permanent and transitory innovations on the US term structure and find pronounced spillovers between the shocks of the term structure determinants. An interesting result depicts a key role of the spillovers of structural mid-term rate cycle shocks in the formation of the risk premiums.