ABSTRACT
Fixed-income portfolio managers must contend with general shifts in the level of rates, relative shifts among different maturities, and change in the degree of volatility of rates. The pair of conditional probabilities allows environmental variables to influence both the direction and volatility of interest rates. However, it would be far better to actively manage portfolios if one could anticipate events in the Treasury bond market. Gibson documented the correlation of interest rates with the general price level and with the business cycle about seventy years ago, using very long period data on British government bonds. The most volatile environments occur when interest rates are most unpredictable because the range of future outcomes spans the widest possible range of outcomes. The Logit models are a way of making empirical generalizations about the behavior of interest rates, but they do not in and of themselves determine an investment policy.
