Forecasting the past: the case of US interest rate forecasts

Abstract

This study evaluates 10-year US government bond yield forecasts and three-month US Treasury bill rate forecasts for the period between October 1989 and December 2004. In total, 136 forecast time series with approximately 13,800 forecast data were scrutinized, making this the most extensive analysis of interest rate forecasts to date. Not one of the forecast time series proved to be unbiased. In the majority of cases, information from the past was not efficiently integrated into the forecasts. The sign accuracy is significantly better than random walk forecasts in only a very few of the forecast time series. The modified Diebold-Mariano test for forecast encompassing reveals that the information content of most of the forecast time series is lower than that of the naive forecasts, the simple ARIMA models, the implicit forward rates, or average interest rate expectations. The forecasting process is dominated by the present and past market situation.