NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Carolin E. Pflueger, Luis M. Viceira

NBER Working Paper No. 16892
Issued in March 2011
NBER Program(s):   AP   ME

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.

download in pdf format
   (855 K)

email paper

This paper is available as PDF (855 K) or via email.

This paper was revised on October 2, 2013

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16892

Users who downloaded this paper also downloaded these:
Pflueger and Viceira w16903 Inflation-Indexed Bonds and the Expectations Hypothesis
Campbell, Shiller, and Viceira w15014 Understanding Inflation-Indexed Bond Markets
Fleckenstein, Longstaff, and Lustig w16358 Why Does the Treasury Issue Tips? The Tips–Treasury Bond Puzzle
Reinhart and Sbrancia w16893 The Liquidation of Government Debt
Hamilton and Wu w16956 The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us