Macro factors drive bond prices, shaping yield curve dynamics up to 85%.
Researchers studied how bond yields and economic factors interact using a model that considers inflation, economic growth, and hidden variables. By applying restrictions based on the absence of arbitrage, they found that including macro factors in the model improves yield curve forecasting. Macro factors explain most of the changes in bond yields, especially at the short and middle parts of the curve, while hidden factors still play a significant role at the long end.