Expected Inflation and Other Determinants of Treasury Yields

Shocks to nominal bond yields are comprised of news about expected future inflation, news about expected future real short rates, and news about expected excess returns — all over the life of the bond. I estimate the magnitude of the first component for short and long maturity Treasury bonds. At a quarterly frequency, variances of news about expected inflation account for between 10 to 20% of variances of yield shocks. Standard dynamic models with long run risk imply corresponding variance ratios close to one. Habit formation models fare somewhat better. The magnitudes of shocks to real rates and expected excess returns cannot be determined reliably in the data owing to statistical uncertainty of the persistence of real rate shocks