Default Risk Factor

The Information in the Term Structure: An Update

Default Risk Factor

Panel A of Table 4 shows that the variable maturity portfolio earns higher average returns than any of the fixed maturity portfolios. This holds for the entire 1965-1999 period as well as the two subperiods. The average return difference for the 1965-1999 period varies from 0.25% per year for the Buy 11/Sell 6 portfolio, to 1.23% per year for the Buy 1/Sell 0 portfolio. The t-statistics in Panel B show that all of the return differences for the 1965-1999 period are reliably positive, as are most of the subperiod differences. The variable maturity portfolio does allow investors to earn the premiums that are reflected in forward rates.


There is important information in the term structure of interest rates. There is information about what the spot rate of interest will be next month. There is also information about what next month's Treasury bill returns will be. This information can be used to buy Treasury bills that will realize higher average returns than other Treasury bills. This information has been present in the term structure for at least the past 35 years. Finally, there does not appear to be any more information revealed by an inverted yield curve than by a normal yield curve.

The helpful comments of David Booth, Truman Clark, Eugene Fama, Ken French, Dave Plecha, Eduardo Repetto, Jeanne Sinquefield, and Rex Sinquefield are gratefully acknowledged.

Fama, Eugene F. "The Information in the Term Structure." Journal of Financial Economics, vol. 13, no. 4 (December 1984): 509-528.

Fama, Eugene F. "Term Premiums and Default Premiums in Money Markets." Journal of Financial Economics, vol. 17, no. 1 (September 1986): 175-196.

Fama, Eugene F., and Robert R. Bliss. "The Information in Long-Maturity ForwardRates." American Economic Review, vol. 77, no. 4 (September 1987): 680-692.

This article contains the opinions of the author and those interviewed by the author but not necessarily Dimensional Fund Advisors Inc. or DFA Securities Inc., and does not represent a recommendation of any particular security, strategy or investment product. The author's opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

October 2000