<![CDATA[MoneyScience: The Review of Financial Studies's blog: Expected Returns in Treasury Bonds]]>
http://www.moneyscience.com/pg/blog/ReviewofFinancialStudies/read/720314/expected-returns-in-treasury-bonds?view=rss
http://www.moneyscience.com/pg/blog/ReviewofFinancialStudies/read/720314/expected-returns-in-treasury-bondsTue, 08 Sep 2015 07:15:56 -0500
http://www.moneyscience.com/pg/blog/ReviewofFinancialStudies/read/720314/expected-returns-in-treasury-bonds
<![CDATA[Expected Returns in Treasury Bonds]]>We study risk premium in U.S. 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.]]>720314