Treasury Bill Yields: Overlooked Information

Abstract

Suppose a risk premium factor denotes the time-varying market prices of risk in the Treasury bond market. The question is whether the risk premium factor aects bond prices. Equivalently, we may ask whether the factor is spanned by the crosssection of term structure. This paper nds that the factor is almost but not completely hidden from term structure. Particularly, Treasury bill yields are shown to have unique information about the risk premium factor, which is missing from Treasury bonds. Moreover, the factor is found to be visualized as a wedge shape on Treasury bill yields. The factor predicts a decrease in the level factor of term structure, but survey forecasts do not seem to be aware of its existence. The risk premium factor also predicts negative economic growth meanwhile the slope factor predicts positive growth. This implies that the risk premium and slope factors have qualitatively dierent information. The risk premium factor also improves the out-of-sample forecasts of future term structure by wielding its forecastability of the level factor.