DP15122 Fundamental Disagreement about Monetary Policy and the Term Structure of Interest Rates
Using a unique dataset of individual professional forecasts we document disagreement about
the future path of monetary policy particularly at longer horizons. The stark differences in
short rate forecasts imply strong disagreement about the risk-return trade-off of longer-term
bonds. Longer-horizon short rate disagreement co-moves with term premiums. We estimate an
affine term structure model in which investors hold heterogeneous beliefs about the long-run
level of rates. Our model fits Treasury yields and the short rate paths predicted by different
groups of investors and thus matches the observed differences in expected return profiles.
Investors who correctly anticipated the secular decline in rates became increasingly important
for the marginal pricing of risk in the Treasury market. Accounting for heterogeneity in
investment performance eliminates the downward trend in the term premium.