Return Predictability in the Treasury Market: Real Rates, Inflation, and Liquidity

50 Pages Posted: 15 Mar 2011 Last revised: 27 Sep 2013

See all articles by Carolin E. Pflueger

Carolin E. Pflueger

National Bureau of Economic Research (NBER); University of Chicago - Harris School of Public Policy

Luis M. Viceira

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 26, 2013

Abstract

Estimating the liquidity differential between inflation-indexed and nominal bond yields, we separately test for time-varying real rate risk premia, inflation risk premia, and liquidity premia in U.S. and U.K. bond markets. We find strong, model independent evidence that real rate risk premia and inflation risk premia contribute to nominal bond excess return predictability to quantitatively similar degrees. The estimated liquidity premium between U.S. inflation-indexed and nominal yields is systematic, ranges from 30 bps in 2005 to over 150 bps during 2008-2009, and contributes to return predictability in inflation-indexed bonds. We find no evidence that bond supply shocks generate return predictability.

Keywords: Term structure, Real interest rate risk, Inflation risk, Inflation-Indexed Bonds

JEL Classification: G12

Suggested Citation

Pflueger, Carolin E. and Pflueger, Carolin E. and Viceira, Luis M., Return Predictability in the Treasury Market: Real Rates, Inflation, and Liquidity (September 26, 2013). Available at SSRN: https://ssrn.com/abstract=1785842 or http://dx.doi.org/10.2139/ssrn.1785842

Carolin E. Pflueger

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
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University of Chicago - Harris School of Public Policy ( email )

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Chicago, IL 60637
United States

Luis M. Viceira (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6331 (Phone)
617-496-6592 (Fax)

HOME PAGE: http://www.people.hbs.edu/lviceira

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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