How Well Do Constant-Maturity Treasures Approximate the On-the-Run Term Structure?

Abstract

The on-the-run term structure is generally estimated from yields on securities that sell at or near their par values. These yields can be obtained either from market data or from published estimates of par yields, known as constant-maturity Treasury yields. The authors compare the use of constant-maturity yields as an alternative to actual yields observed in the Treasury market. For a sample of month-end data covering the period January 1, 1990, through December 31, 1997, they find that constant-maturity Treasury yields produce a significantly greater pricing errors in term structure estimation than market Treasury yields both in-sample and out-of-sample. The results also suggest that the Treasury Department can improve its estimation of constant-maturity yields by using a continuous bootstrapping methodology based on an assumed functional form.