We study the drift and cyclical components in U.S. Treasury bonds. We find that bond
yields are drifting because they reflect the drift in monetary policy rates. Empirically,
modeling the monetary policy drift using demographics and productivity trends, plus
long-term inflation expectations, leads to cyclical deviations of bond prices from their
drift that predict bond returns in- and out-of-sample. These bond cycles can be interpreted
as term premia or/and temporary deviations from rational expectations in a
behavioral framework. Through the lens of our model, we detect a significant role of
the latter in determining the cyclical properties of yields with short maturities.