Above maturities of six months to a year, the equilibrium yield curve for government securities consists of two statistically independent components. The first, the so-called “consol yield,” is the same for every maturity. Since changes in the consol rate have the same impact on yield for every maturity, mere knowledge of their sign dominates opportunities for trading profits.

The absolute value of the second component, “spread,” declines exponentially as maturity lengthens, and at a relative rate that is constant over time, despite variations in both its sign and magnitude. Examination of 20 years of evidence suggests that any departures of the actual yield curve from the exponential model are only temporary.

The authors argue that their model satisfies the “no free lunch” property of efficient securities markets: There is no strategy that will increase expected total return in the absence of forecasting skill. They also argue that their model is consistent with the trading behavior of professional bond managers, who judge the yield on a bond by making “butterfly comparisons” with yields on bonds of greater and lesser maturity, disregarding investment horizon.