Short-rate expectations and unexpected returns in treasury bonds

Published

Journal Article

© The Author(s) 2018. I document large and persistent errors in investors' expectations about the short-term interest rate over the business cycle. The largest errors arise in economic downturns and during Fed easings when investors overestimate future short rates and, thus, underestimate future bond returns. At a one-year horizon, errors about the path of the real rate (as opposed to inflation) account for 80% of short-rate forecast error variance, with more than half of that number attributed to the Fed easing more aggressively than the public expected. Short-rate forecast errors induce ex post predictability of excess returns on Treasury bonds that is not due to time-varying risk premium.

Full Text

Duke Authors

Cited Authors

  • Cieslak, A

Published Date

  • January 1, 2018

Published In

Volume / Issue

  • 31 / 9

Start / End Page

  • 3265 - 3306

Electronic International Standard Serial Number (EISSN)

  • 1465-7368

International Standard Serial Number (ISSN)

  • 0893-9454

Digital Object Identifier (DOI)

  • 10.1093/rfs/hhy051

Citation Source

  • Scopus