Return Predictability in the Treasury Market: Real Rates, Inflation, and Liquidity

Carolin Pflueger and Luis Viceira ()

No 16892, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Estimating the liquidity differential between inflation-indexed and nominal bond yields, we separately test for time-varying real rate risk premia, inflation risk premia, and liquidity premia in U.S. and U.K. bond markets. We find strong, model independent evidence that real rate risk premia and inflation risk premia contribute to nominal bond excess return predictability to quantitatively similar degrees. The estimated liquidity premium between U.S. inflation-indexed and nominal yields is systematic, ranges from 30 bps in 2005 to over 150 bps during 2008-2009, and contributes to return predictability in inflation-indexed bonds. We find no evidence that bond supply shocks generate return predictability.

JEL-codes: G12 (search for similar items in EconPapers)
Date: 2011-03
Note: AP ME
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Citations: View citations in EconPapers (16)

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Working Paper: Return Predictability in the Treasury Market: Real Rates, Inflation, and Liquidity (2013)
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