The sensitivity of long-term rates to short-term rates represents a puzzle for standard macro-finance models. Post-FOMC announcement drift in Treasury markets after Federal Funds target changes contributes to the excess sensitivity of long rates. A model in which some investors slowly adjust their extrapolative expectations of future short rates can qualitatively match the dynamics of yields. We provide evidence from interest rate forecasts and mutual fund flows that is consistent with the sticky, extrapolative version of the expectations hypothesis.
