Predicting Bond Returns: 70 Years of International Evidence
Financial Analysts Journal, 2021, 77(3): 133-155.
40 Pages Posted: 24 Jun 2020 Last revised: 18 Aug 2021
Date Written: June 19, 2020
We examine the predictability of government bond returns using a deep sample spanning 70 years of international data across the major bond markets. Using an economic, trading-based testing framework we find strong economic and statistical evidence of bond return predictability with a Sharpe ratio of 0.87 since 1950. This finding is robust over markets and time periods, including 30 years of out-of-sample data on international bond markets and a set of nine additional countries. Furthermore, the results are consistent over economic environments, including prolonged periods of rising or falling rates, and is exploitable after transaction costs. The predictability relates to predictability in inflation and economic growth. Overall, government bond premia display predictable dynamics and the timing of international bond market returns offers exploitable opportunities to investors.
Keywords: return predictability, asset pricing, market efficiency, bond risk premia, momentum, value, carry.
JEL Classification: G11, G12
Suggested Citation: Suggested Citation