Principal component = information equilibrium model?
John Cochrane has an interesting paper/blog post about forecasting interest rates. I'm not sure I've absorbed it all quite yet, but I have a quick take.
The key point Cochrane is making is that the reason adding an inflation term to forecast models of interest rates improves them is really just because inflation has a trend -- a trend that roughly follows the first principal component term (PC1 at the link). Adding a trend (with principal components) allows you to get a really good fit -- and in fact it is this trend that captures most of the forecasting capability of the model. Cochrane says this means there a strong one-factor model of bond yields across all maturity. Basically, one interest rate describes them all pretty well.
This is just a cheesy overlay on the principal component graph, but that first principal component seems to be well described by the information equilibrium model:
