This chapter is a revised version of a Citigroup (Salomon Brothers) research report. Such report remains the property of Citigroup, and its disclaimers apply. The author wishes to thank Larry Bader, Eduardo Canabarro, Ajay Dravid, Francis Glenister, Ray Iwanowski, Cal Johnson, Tom Klaffky, Rick Klotz, Stan Kogelman, Janet Showers, and Charlie Ye for their helpful comments.

1. Details on each of the three influences on the yield-curve can be found at Antti Ilmanen, “Market’s Rate Expectations and Forward Rates,” Journal of Fixed Income (September 1996), pp. 8–22; Antti Ilmanen, “Does Duration Extension Enhance Long-Term Expected Returns?” Journal of Fixed Income (September 1996), pp. 23–36; and Antti Ilmanen, “Convexity Bias in the Yield Curve,” Chapter 3 in Narasimgan Jegadeesh and Bruce Tuckman (eds.), Advanced Fixed-Income Valuation Tools (New York: Wiley, 2000).