Monetary Policy and Bond Prices with Drifting Equilibrium Rates

Carlo A. Favero, Alessandro Melone, Andrea Tamoni

Research output: Contribution to journalArticlepeer-review


We study the drift and cyclical components in U.S. Treasury bonds. We find that bond yields are drifting because they reflect the drift in monetary policy rates. Empirically, modeling the monetary policy drift using demographics and productivity trends, plus long-term inflation expectations, leads to cyclical deviations of bond prices from their drift that predict bond returns in- and out-of-sample. These bond cycles can be interpreted as term premia or/and temporary deviations from rational expectations in a behavioral framework. Through the lens of our model, we detect a significant role of the latter in determining the cyclical properties of yields with short maturities.

Original languageEnglish (US)
JournalJournal of Financial and Quantitative Analysis
StateAccepted/In press - 2023
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics


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