Macroeconomic Expectations in Bond Returns

73 Pages Posted: 19 Apr 2022

See all articles by Yuting Gong

Yuting Gong

SILC Business School, Shanghai University

Feng Zhao

University of Texas at Dallas - Jindal School of Management

Xiaoneng Zhu

Shanghai University of Finance and Economics

Date Written: March 12, 2022

Abstract

Recent studies show that the consensus forecasts of professional forecasters and central bankers underreact to news relative to full-information rational expectations. However, can the treasury bond market anticipate such underreaction through information aggregation? To answer this question, we extract macroeconomic expectations in bond returns from a large panel dataset of real-time macro series and compare them to the projection of survey forecasts on bond returns. We find that the extracted macroeconomic expectations subsume the information in survey forecasts, forecast revisions and even the ex-post forecast errors in bond return prediction. However, macroeconomic expectations in bond returns do not anticipate the underreaction by the major market players. Furthermore, we assess a macro-finance term structure model including inflation expectations and the extracted macroeconomic expectations. We find that macroeconomic expectations generate significant fluctuations in term premiums over business cycles and produce lower term premiums in the most recent decade.

Suggested Citation

Gong, Yuting and Zhao, Feng and Zhu, Xiaoneng, Macroeconomic Expectations in Bond Returns (March 12, 2022). Available at SSRN: https://ssrn.com/abstract=4055944 or http://dx.doi.org/10.2139/ssrn.4055944

Yuting Gong

SILC Business School, Shanghai University ( email )

China

Feng Zhao

University of Texas at Dallas - Jindal School of Management ( email )

800 W. Campbell Rd. SM 31
Richardson, TX 75080
United States
972-883-5815 (Phone)

Xiaoneng Zhu (Contact Author)

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

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