Expected Returns in Treasury Bonds
Northwestern University - Kellogg School of Management
Birkbeck, University of London
August 10, 2013
We decompose Treasury yields into long-horizon inflation expectations and maturity related cycles. Cycles combine the risk premium and the business cycle variation in short rate expectations. From cycles, we construct a measure of expected bond returns. The risk premium factor varies at a frequency higher than the business cycle, and predicts excess bond returns in- and out-of sample. The decomposition captures in a parsimonious way the predictable element of bond returns usually measured with a linear combination of forward rates.
Number of Pages in PDF File: 66
Keywords: term premia, bond return forecasting factor
JEL Classification: E32, E44, G12working papers series
Date posted: November 15, 2010 ; Last revised: August 28, 2013
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