In 2007 all ECB publications feature a motif taken from the €20 banknote. This paper can be downloaded without charge from

4 In 2007 all ECB publications feature a motif taken from the €20 banknote. This paper can be downloaded without charge from

publications feature a motif taken from the €20 banknote. This paper can be downloaded without charge from

In 2007 all ECB publications feature a motif taken from the €20 banknote. This paper can be downloaded without charge from

This paper explores the sources of variation in expected excess returns on bonds within a Gaussian dynamic term structure model that: (i) conditions on information about output growth and inflation; (ii) accommodates variation in these macro variables that is orthogonal to variation in the yield curve; and (iii) captures the significant predictive power of macro variables for excess returns (over and above standard level, slope, and curvature factors). We compute excess returns on several portfolio positions in bonds that are specifically designed to reveal information about which risks are priced and the effects of macroeconomic shocks on the market prices of these risks. The evidence suggests that two risk factors underlie variation in expected excess returns, and that the growth rate of output is a particularly important determinant of both term premia and compensation for exposure to unpredictable changes in the slope of the yield curve. Finally, we explore the behavior of risk premiums associated with inflation and output risks that are spanned by the yield curve and, through the lens of our model, reassess the relationships between risk premiums, the shape of the yield curve, and macroeconomic activity. We are grateful to feedback from seminar participants at the University of Chicago, the Federal

In 2007 all ECB publications feature a motif taken from the €20 banknote. This paper can be downloaded without charge from

In 2007 all ECB publications feature a motif taken from the €20 banknote. This paper can be downloaded without charge from

In 2007 all ECB publications feature a motif taken from the €20 banknote. This paper can be downloaded without charge from

In 2011 all ECB publications feature a motif taken from the €100 banknote. NOTE: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. This paper can be downloaded without charge from