Typically, the yield curve depicts a line that rises from lower interest rates on shorter-term bonds to higher interest rates on longer-term bonds. Researchers in finance have studied the yield curve statistically and have found that shifts or changes in the shape of the yield curve are attributable to a few unobservable factors (Dai and Singleton 2000). Specifically, empirical studies reveal that more than 99% of the movement of various Treasury bond yields are captured by three factors, which are often called “level,” “slope,” and “curvature” (Litterman and Scheinkman 1991). The names describe how the yield curve shifts or changes shape in response to a shock, as shown in Figure 1. Panel A of Figure 1 illustrates the influence of a shock to the “level” factor on the yield curve.