Macroeconomic Expectations in Bond Returns
73 Pages Posted: 19 Apr 2022
Date Written: March 12, 2022
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: Suggested Citation