Incorporating economic indicators and market sentiment effect into US Treasury bond yield prediction with machine learning

Zichao Li ,Bingyang Wang ,Ying Chen

doi:10.24294/jipd.v8i9.7671

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Incorporating economic indicators and market sentiment effect into US Treasury bond yield prediction with machine learning

Zichao Li

Bingyang Wang

Ying Chen

Journal of Infrastructure Policy and Development 2024, 8(9), 7671; https://doi.org/10.24294/jipd.v8i9.7671

Submitted：30 Jun 2024

Accepted：08 Jul 2024

Published：04 Sept 2024

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Abstract

Accurate prediction of US Treasury bond yields is crucial for investment strategies and economic policymaking. This paper explores the application of advanced machine learning techniques, specifically Recurrent Neural Networks (RNN) and Long Short-Term Memory (LSTM) models, in forecasting these yields. By integrating key economic indicators and policy changes, our approach seeks to enhance the precision of yield predictions. Our study demonstrates the superiority of LSTM models over traditional RNNs in capturing the temporal dependencies and complexities inherent in financial data. The inclusion of macroeconomic and policy variables significantly improves the models’ predictive accuracy. This research underscores a pioneering movement for the legacy banking industry to adopt artificial intelligence (AI) in financial market prediction. In addition to considering the conventional economic indicator that drives the fluctuation of the bond market, this paper also optimizes the LSTM to handle situations when rate hike expectations have already been priced-in by market sentiment.

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References

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