Price Pressure and Price Discovery in the Term Structure of Interest Rates

We use a latent factor term structure model to decompose US Treasury yield curve movements into a transitory, price pressure effect due to dealer inventories and a virtually permanent change related to order flow. Dealer inventories are important in explaining yield curve dynamics with futures exposure at the short-end of the yield curve having less price pressure effect than cash exposure. Price discovery in the level and the slope of interest rates is linked more to long-term Treasury futures than to long-term Treasury cash securities.