Yield Spreads and Interest Rate Movements: A Bird's Eye View

John Y. Campbell, Robert J. Shiller

NBER Working Paper No. 3153 (Also Reprint No. r1613)
Issued in October 1989
NBER Program(s):Monetary Economics

The expectations theory of the term structure implies that the spread between a longer-term interest rate and a shorter-term interest rate forecasts two subsequent interest rate changes: the change in yield of the longer-term bond over the life of the shorter-term bond, and a weighted average of the changes in shorter-term rates over the life of the longer-term bond. For postwar U.S. data from Mcculloch [1987] and just about any combination of maturities between one month and ten years we find that the former relation is not borne out by the data, the latter roughly is. When the yield spread is high the yield on the longer-term bond tends to fall, contrary to the expectations theory; at the same time, the shorter-term interest rate tends to rise, just as the expectations theory requires. We discuss several possible interpretations of these findings. We argue that they are consistent with a model in which the spread is a multiple of the value implied by the expectations theory. This model could be generated by time-varying risk premia which are correlated with expected increases in short-term interest rates, or by a failure of rational expectations in our sample period.

download in pdf format
   (273 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w3153

Published: Review of Economic Studies, Vol. 58, pp. 495-514, (1991). citation courtesy of

Users who downloaded this paper also downloaded* these:
Campbell and Shiller w1203 A Simple Account of the Behavior of Long-Term Interest Rates
Cochrane and Piazzesi w9178 Bond Risk Premia
Shiller and McCulloch w2341 The Term Structure of Interest Rates
Campbell w5031 Some Lessons from the Yield Curve
Mishkin w2626 What Does the Term Structure Tell Us About Future Inflation?
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us