Volume 17, No. 2, 2019
This paper looks to establish a new heuristic for investors, giving them a simple, intuitive way to relate bond yields to prevailing trends in growth and inflation. The model offers an alternative to forecasting surveys, which have been over-estimating 10-year Treasury yields for decades and continue to project yields above 4% in the long run. The model does well in in-sample and out-of-sample tests used in the literature to evaluate other measures of value. The model can be used on its own or in conjunction with other models to forecast yields and also as a benchmark to evaluate yield forecasts. The model is consistent with some of the more advanced economic models of interest rates that suggest that the low bond yields of recent years are in line with broader economic trends, rather than due to temporary factors that are likely to reverse quickly.