THE PREDICTIVE POWER OF YIELD SPREADS FOR FUTURE INTEREST-RATES - EVIDENCE FROM THE DANISH TERM STRUCTURE

The predictive power of yield spreads for future interest rates is examined using a new database of zero-coupon bonds yields from the Danish bond market. The evidence shows that during the period of monetary targeting, 1976:1-1985:7, yield spreads have substantial predictive power, and the results tend to support the rational expectations version of the classical expectations theory of the term structure. However, for the recent period 1985:8-1991:12, characterized by a shift to a policy of interest rate targeting, the predictive power of yield spreads disappears.