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0 comments / 10/05/2019 / Stephanie Scoles

A Model of Bond Value: Explaining Yields with Growth and Inflation

Volume 17, No. 2, 2019
Thomas Shevlin

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.

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