Expected Returns in Treasury Bonds
Duke University, Fuqua School of Business
Norges Bank Investment Management
January 12, 2015
We study risk premium in US Treasury bonds. We decompose Treasury yields into inflation expectations and maturity-specific interest rate cycles, which we define as variation in yields orthogonal to expected inflation. The short-maturity cycle captures the real short-rate dynamics. Jointly with expected inflation, it comprises the expectations hypothesis (EH) term in the yield curve. Controlling for the EH term, we extract a measure of risk premium variation from yields. The risk premium factor forecasts excess bond returns in and out of sample and subsumes the common bond return predictor obtained as a linear combination of forward rates.
Number of Pages in PDF File: 60
Keywords: term premia, bond return forecasting factor
JEL Classification: E43, G12
Date posted: November 15, 2010 ; Last revised: April 2, 2015
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