We develop a novel term-structure model for pricing GDP-linked bonds, hypothetical securities with cash-flows indexed to the level of U.S. GDP. For this purpose, we rely on a term-structure model of equity yields estimated using the prices of dividend swaps, which we assume span GDP growth. Our approach provides a novel way of estimating the relative cost of conventional and GDP-linked bonds, as well as measuring more general market-based expectations of (and risks around) GDP growth. Our model predicts that U.S. GDP-linked bonds would typically have yields lower than those on conventional Treasury bonds with the same maturity in our sample from 2010 to 2017. Positive expected future GDP growth lowers the yield on GDP-linked bonds relative to conventional bonds, which typically more than offsets the estimated GDP risk premium demanded by investors for holding GDP risk.

Dynamic no-arbitrage affine term structure models (ATSMs) have become the standard framework for monetary policy-makers to decompose long-term bond yields into expectations of future short-term risk-free interest rates and the term premia that compensate investors in long-term bonds for risk. This paper presents estimates of ATSMs for the UK and explores how much weight users of these models can place on point estimates of term premia. Over much of the period since the early 1990s, broad movements in estimated premia are robust across a wide range of reasonable specifications. But there is substantial model and parameter uncertainty associated with these models and estimates of the time-series dynamics of yields may be biased in short samples. This model uncertainty is greater towards the end of our sample period, when bond yields have been well below historically normal levels.