This paper presents a dynamic latent factor model of the yield curve that incorporates macroeconomic variables (real activity, inflation, and monetary policy) and latent factors (level, slope, and curvature). The model is estimated using a state-space framework, which allows for the simultaneous estimation of the yield curve and the underlying factors. The model is tested against the expectations hypothesis, which posits that long-term interest rates reflect expected future short-term rates. The results show strong evidence of macroeconomic effects on future yield curve movements and evidence of a reverse influence as well. The model also shows that the yield curve can provide information about macroeconomic variables, suggesting a bidirectional relationship between the macroeconomy and the yield curve. The paper concludes that the expectations hypothesis holds reasonably well during certain periods but does not hold across the entire sample. The model is estimated using a state-space approach, which allows for the simultaneous estimation of the yield curve and the underlying factors. The model is tested against the expectations hypothesis, which posits that long-term interest rates reflect expected future short-term rates. The results show strong evidence of macroeconomic effects on future yield curve movements and evidence of a reverse influence as well. The model also shows that the yield curve can provide information about macroeconomic variables, suggesting a bidirectional relationship between the macroeconomy and the yield curve. The paper concludes that the expectations hypothesis holds reasonably well during certain periods but does not hold across the entire sample.This paper presents a dynamic latent factor model of the yield curve that incorporates macroeconomic variables (real activity, inflation, and monetary policy) and latent factors (level, slope, and curvature). The model is estimated using a state-space framework, which allows for the simultaneous estimation of the yield curve and the underlying factors. The model is tested against the expectations hypothesis, which posits that long-term interest rates reflect expected future short-term rates. The results show strong evidence of macroeconomic effects on future yield curve movements and evidence of a reverse influence as well. The model also shows that the yield curve can provide information about macroeconomic variables, suggesting a bidirectional relationship between the macroeconomy and the yield curve. The paper concludes that the expectations hypothesis holds reasonably well during certain periods but does not hold across the entire sample. The model is estimated using a state-space approach, which allows for the simultaneous estimation of the yield curve and the underlying factors. The model is tested against the expectations hypothesis, which posits that long-term interest rates reflect expected future short-term rates. The results show strong evidence of macroeconomic effects on future yield curve movements and evidence of a reverse influence as well. The model also shows that the yield curve can provide information about macroeconomic variables, suggesting a bidirectional relationship between the macroeconomy and the yield curve. The paper concludes that the expectations hypothesis holds reasonably well during certain periods but does not hold across the entire sample.