Uncertainty and the term structure of interest rates

We document a new stylized fact linking uncertainty to the term structure of interest rates: unanticipated increases in uncertainty generate a yield curve that is lower, steeper, and less curved. Using a Yields-Macro Dynamic Nelson–Siegel model applied to U.S. Treasury yields, uncertainty measures, and macroeconomic aggregates, we show that this result is robust across financial, macroeconomic, and policy-related sources of uncertainty. A stylized asset-pricing model provides a structural interpretation, tracing these effects to precautionary motives under investor prudence. Counterfactual analyses show that uncertainty lowers the expected path of short rates while raising term premia, consistent with precautionary and risk-compensation mechanisms. We also develop an efficient Bayesian algorithm for estimating Yields-Macro Dynamic Nelson–Siegel models with constant or time-varying exponential decay parameters.