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Macroeconomic uncertainty and the distant forward-rate slope

Journal of Empirical Finance. June 1, 2018

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Over the 1990 to 2014 period, we show that the macroeconomic-uncertainty index of Jurado et al. (2015) is a powerful empirical determinant of the slope in Treasury forward interest rates over the 10- to 30-year term-structure segment. The strong negative partial relation between macroeconomic uncertainty and the distant forward-rate slope remains reliably evident in a multivariate setting that includes expected bond yield volatility (as a control for convexity’s influence), economic growth, expected inflation, and five other well-known uncertainty and risk measures. Beyond the well-known bond convexity channel for promoting a downward sloping distant forward-rate slope, our findings suggest that higher macroeconomic uncertainty can promote a more downward slope in distant forward rates through a hedge channel in the sense of Campbell et al. (2017). Consistent with the hypothesized hedge channel, we also document striking cross-sectional variation in how bond returns are related to macroeconomic uncertainty, both across mid- and long-horizon T-bonds and across high and low credit-risk corporate bonds.