Term Premium Determinants, Return Enhancement and Interest Rate Predictability

This paper investigates whether simple term premium estimation techniques provide potential for return enhancement and interest rate predictability. Using short‐term US government securities, during 1959—93, it is demonstrated that utilization of such knowledge allows investors to enhance returns on fixed income portfolios, provided that other than money market alternatives can be considered as potential repositories of funds. In addition, such knowledge yielded short‐term interest rate predictions that were weakly superior to other methodologies, including the naive no‐change forecast, except during the volatile early 1980s.