Two factors along the yield curve

Are all two-factor term structure models the same? We specify three models and estimate each on different parts of the U.S. yield curve. The exercise provides insights on reconciling the term structure's time series with its cross-section and on relating it to fundamentals. Our evidence favours models where one factor reverts to a time-varying mean. One such model explains shorter-term yields and another longer-term yields. The models differ primarily because mean reversion is much faster near the yield curve's short end than near its long end. The factors seem to capture mean reversion in inflation and the Fed's target rate.