Treasury Return Predictability and Investor Sentiment

Journal of Financial Research, Forthcoming

29 Pages Posted: 21 Aug 2023

See all articles by Chen Gu

Chen Gu

Shanghai Business School - Research Center of Finance

Xu Guo

Shenzhen University - College of Economics

Ruwan Adikaram

University of Minnesota - Duluth - Department of Accounting

Kam C. Chan

Western Kentucky University - Department of Accounting and Finance

Jing Jerry Lu

Chongqing University

Date Written: August 20, 2023

Abstract

We document that the Treasury market investor sentiment (TSENT) of institutional investors is a powerful predictor of bond risk premia. Specifically, TSENT positively predicts Treasury bond excess returns in- and out-of-sample. The forecasting gains of TSENT are incremental to that in conventional bond return predictors: Fama-Bliss forward spreads (FB), the Cochrane and Piazzesi (2005) forward rate factor (CP), and the Ludvigson and Ng (2009) macro factor (LN), as well as equity market sentiment proxies such as the investor sentiment index of Baker and Wurgler (2006) and the PLS sentiment index of Huang, Jiang, Tu, and Zhou (2015). Asset allocation analysis indicates the forecasting power of TSENT is economically valuable to investors. Finally, we show that the time-series bond risk premia predictability associated with TSENT relates to its predictive power for macroeconomic performance, such as payroll employment, unemployment rate, and industrial production.

Keywords: Treasury; investor sentiment; return predictability; economic value

JEL Classification: G11; G12; G17

Suggested Citation

Gu, Chen and Guo, Xu and Adikaram, Ruwan and Chan, Johnny and Lu, Jing Jerry, Treasury Return Predictability and Investor Sentiment (August 20, 2023). Journal of Financial Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4546307

Chen Gu (Contact Author)

Shanghai Business School - Research Center of Finance ( email )

Shanghai
China

Xu Guo

Shenzhen University - College of Economics ( email )

5th Floor, Wenke Building
3688 Nanhai Road
Shenzhen, Guangdong 518060
China

Ruwan Adikaram

University of Minnesota - Duluth - Department of Accounting

Johnny Chan

Western Kentucky University - Department of Accounting and Finance ( email )

Bowling Green, KY 42101
United States

Jing Jerry Lu

Chongqing University

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