Bond Supply and Excess Bond Returns

47 Pages Posted: 11 Sep 2007 Last revised: 12 Jan 2010

See all articles by Robin M. Greenwood

Robin M. Greenwood

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

Dimitri Vayanos

London School of Economics; Center for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: January 8, 2010

Abstract

We examine empirically how the maturity structure of government debt affects bond yields and excess returns. We organize our investigation around a model of preferred habitat, in which supply shocks impact an arbitrage-free term structure. Consistent with the model, we find that the relative supply of long-term bonds is positively related to bond yield spreads and excess returns, with the effects being larger for longer-maturity bonds. Moreover, supply predicts positively excess returns even after controlling for term-structure slope, and supply and slope become stronger predictors of returns following periods when arbitrageurs lose money.

Keywords: Term Structure of Interest Rates, Bond Risk Premia, Limited Arbitrage, Public Debt Management

JEL Classification: E43, G12, H63

Suggested Citation

Greenwood, Robin M. and Vayanos, Dimitri, Bond Supply and Excess Bond Returns (January 8, 2010). AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1012607 or http://dx.doi.org/10.2139/ssrn.1012607

Robin M. Greenwood

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6979 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Dimitri Vayanos (Contact Author)

London School of Economics ( email )

A350
Houghton Street
London WC2A 2AE
United Kingdom
+44 (0)20 7955 6382 (Phone)
+44 (0)20 7955 7420 (Fax)

Center for Economic Policy Research (CEPR)

London
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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