A Macroeconomic Analysis of the Latent Factors of the Yield Curve: Curvature and Real Activity

Examining the relation between yields at different maturities is crucial for both macroeconomists and financial economists. From a macro-economic perspective, the short rate is the policy instrument under the control of the monetary authority; however, from a financial perspective, movements in short-term rates are analyzed to forecast longer yields’ dynamics, since yields on long-term bonds are the expected average of risk-adjusted future spot rates. Moreover, the dynamics of the term structure (TS) is influenced both by monetary policy actions and by expectations about policy announcements; while, on the other hand, economists infer the future path of macro variables from different shapes of the yield curve.