We consider forecasting the term structure of interest rates with the assumption that factors driving the yield curve are stationary around a slowly time-varying mean or shifting endpoint. The shifting endpoints are captured using either (i) time series methods (exponential smoothing) or (ii) long-range survey forecasts of either interest rates or inflation and output growth, or (iii) exponentially smoothed realizations of these macro variables. Allowing for shifting endpoints in yield curve factors provides substantial and significant gains in out-of-sample predictive accuracy, relative to stationary and random walk benchmarks. Forecast improvements are largest for long-maturity interest rates and for long-horizon forecasts.
