Bond Supply and Excess Bond Returns
Robin M. Greenwood
Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)
London School of Economics; Center for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
NBER Working Paper No. w13806
We examine empirically how the maturity structure of government debt affects bond yields and excess returns. Our analysis is based on a theoretical model of preferred habitat in which clienteles with strong preferences for specific maturities trade with arbitrageurs. Consistent with the model, we find that (i) the supply of long- relative to short-term bonds is positively related to the term spread, (ii) supply predicts positively long-term bonds' excess returns even after controlling for the term spread and the Cochrane-Piazzesi factor, (iii) the effects of supply are stronger for longer maturities, and (iv) following periods when arbitrageurs have lost money, both supply and the term spread are stronger predictors of excess returns.
Number of Pages in PDF File: 46
Date posted: February 13, 2008