Expected Returns in Treasury Bonds

60 Pages Posted: 15 Nov 2010 Last revised: 2 Apr 2015

See all articles by Anna Cieslak

Anna Cieslak

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Pavol Povala

Norges Bank Investment Management

Date Written: January 12, 2015

Abstract

We study risk premium in US Treasury bonds. We decompose Treasury yields into inflation expectations and maturity-specific interest rate cycles, which we define as variation in yields orthogonal to expected inflation. The short-maturity cycle captures the real short-rate dynamics. Jointly with expected inflation, it comprises the expectations hypothesis (EH) term in the yield curve. Controlling for the EH term, we extract a measure of risk premium variation from yields. The risk premium factor forecasts excess bond returns in and out of sample and subsumes the common bond return predictor obtained as a linear combination of forward rates.

Keywords: term premia, bond return forecasting factor

JEL Classification: E43, G12

Suggested Citation

Cieslak, Anna and Povala, Pavol, Expected Returns in Treasury Bonds (January 12, 2015). Available at SSRN: https://ssrn.com/abstract=1709636 or http://dx.doi.org/10.2139/ssrn.1709636

Anna Cieslak (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919 660 7879 (Phone)

HOME PAGE: https://sites.google.com/site/ancieslak/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pavol Povala

Norges Bank Investment Management ( email )

3 Old Burlington Street
Queensberry House
London, W1S3AE
United Kingdom

HOME PAGE: http://pavol.povala.com

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