Equilibrium Curvature

Wesley Phoa, Ph.D.

Factoring out variation in the level and slope of the US Treasury curve, historical evidence implies the existence of an "equilibrium" curvature for the yield curve which has a simple description independent of any specific yield curve functional form or term structure model. This description is equivalent to a proposition about "typical" rolldown returns. The result has implications for the measurement of slope risk, bond relative value analysis, the study of interest rate market segmentation, and HJM model implementation.