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Casual intuition says that today's term structure reflects all information investors have about expected future yields. However, this is not required by finance theory, nor is it consistent with observed Treasury yield behavior. Kalman filter estimation uncovers a factor that has an almost imperceptible effect on yields, but has clear forecast power for future short-term interest rates and substantial forecast power for future excess bond returns. The factor appears to be related to short-run fluctuations in economic activity.doi:10.1093/rfs/hhr033 fatcat:nctxwwldgjcgbcpevkheqzk2rq