Treasury Bill Yields : Overlooked Information ∗

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 affects bond prices. Equivalently, we may ask whether the factor is spanned by the crosssection of term structure. This paper finds 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 different information. The risk premium factor also improves the out-of-sample forecasts of future term structure by wielding its forecastability of the level factor. ∗I am grateful to Timothy Johnson, Neil Pearson and George Pennacchi for guidance and advice. I appreciate the generous financial support from the Korea Foundation for Advanced Studies. The previous version of this paper was circulated under the title “Short and Long Slopes of Yield Curves Have Different Implications.” †e-mail: [email protected]. The author is responsible for all errors and omissions.