Abstract
This study implements affine term-structure models (ATSM) using indexed bonds data, and derives the dynamics of two macroeconomic factors which determine the expected real rates in the economy. The proposed macro-yields model emphasizes the links between macroeconomic variables and the state variables derived from the ATSMs, by restricting the latent factors so that they behave in accordance with specific macroeconomic variables. Therefore, in this framework, there is no need to integrate the ATSMs with macroeconomic variables in order to get macroeconomic explanations. In addition, the advantages of the macro-yields model against the yields-only model are discussed. The expected short natural real rate in Israel is volatile but the expected long natural real rate is steady at around 3.75 percent.