Bridge over ocean
1 September 2004 Financial Analysts Journal Volume 60, Issue 5

Term-Structure Factor Shifts and Economic News

  1. W. Brian Barrett
  2. Thomas F. Gosnell
  3. Andrea J. Heuson

For this article, daily changes in pure discount yields on U.S. risk-free securities were fit to a theoretically robust term-structure model to derive a set of orthogonal factors measuring the level, slope, and curvature of the yield curve. Changes in these factors at the release of unexpected economic news are reported. This methodology explicitly allows for commonalities in responses in the universe of spot rates, thus painting a rich picture of interest rate reactions to new information. The results have important implications for hedging volatility risk or seeking to profit from predicting volatility in bond prices.

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