Common factors, principal components analysis, and the term structure of interest rates

► We find common factors in bond returns for the USA, UK, and Germany from 1985 to 2005. ► The factors for each country are estimated using principal components analysis (PCA). ► We use CPCA, a multivariate extension to PCA, and PCA to obtain the common factors. ► The common factors are interpreted using factor mimicking portfolio regressions. ► We show that the power of tests of inference for CPCA for this sample is limited.