2 FACTORS ALONG THE YIELD-CURVE

Are all two-factor term structure models the same? We specify three mo dels and estimate each on different parts of the U.S. yield curve. The exercise provides insights on reconciling the term structure's time s eries with its cross-section and on relating it to fundamentals. Our e vidence favours models where one factor reverts to a time-varying mean . One such model explains shorter-term yields and another longer-term yields. The models differ primarily because mean reversion is much fas ter near the yield curve's short end than near its long end. The facto rs seem to capture mean reversion in inflation and the Fed's target ra te.