Macro-expectations, aggregate uncertainty, and expected term premia

Based on expectations data from the Survey of Professional Forecasters (SPF), we construct a real-time proxy for expected term premium changes of US long-term Treasury bonds. We then investigate the economic drivers of these subjective term premium expectations at the level of individual forecasters. Our results indicate that forecasters' term premium expectations are driven by expected macroeconomic conditions as well as the uncertainty of market participants about future output and inflation. An aggregate measure of forecasters' term premium expectations has predictive power for actual bond excess returns over horizons of up to one year.

► We construct a real-time survey-based proxy of expected term premium changes at the level of individual forecasters. ► We find that expected term premium changes are driven by expected output and inflation growth as well as uncertainty about future output and inflation. ► We employ a novel measure of forecaster uncertainty based on the density forecasts and study its relation with forecaster disagreement. ► An aggregate version of our proxy forecasts actual bond excess returns.