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Expected Returns in Treasury Bonds

Anna Cieslak

Northwestern University - Kellogg School of Management

Pavol Povala

Birkbeck, University of London

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

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Date posted: November 15, 2010 ; Last revised: April 2, 2015

Suggested Citation

Cieslak, Anna and Povala, Pavol, Expected Returns in Treasury Bonds (January 12, 2015). Available at SSRN: http://ssrn.com/abstract=1709636 or http://dx.doi.org/10.2139/ssrn.1709636

Contact Information

Anna Cieslak (Contact Author)
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
Pavol Povala
Birkbeck, University of London ( email )
Malet Street
London, WC1E 7HX
United Kingdom
+44 (0) 20 7631 6486 (Phone)
HOME PAGE: http://www.ems.bbk.ac.uk/faculty/povala
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