We study the drift and cyclical components in U.S. Treasury bonds. We find that bond yields are drifting because they reflect the drift in monetary policy rates. Empirically, modeling the monetary policy drift using demographics and productivity trends, plus long-term inflation expectations, leads to cyclical deviations of bond prices from their drift that predict bond returns in- and out-of-sample. These bond cycles can be interpreted as term premia or/and temporary deviations from rational expectations in a behavioral framework. Through the lens of our model, we detect a significant role of the latter in determining the cyclical properties of yields with short maturities.

This paper documents the existence of a slowly evolving trend in the log dividend-price ratio, DP t , determined by a demographic variable, MY t : the middle-aged to young ratio. Deviations of DP t from this long-run component explain transitory but persistent fluctuations in stock market returns. The relation between MY t and DP t is a prediction of an overlapping generation model. The joint significance of MY and DP t in long-horizon forecasting regressions for market returns explains the mixed evidence on the ability of DP t to predict stock returns and provide a model-based interpretation of statistical corrections for breaks in the mean of this financial ratio.

Population-wide increase in life expectancy is a source of aggregate risk. Longevity-linked securities are a natural instrument to reallocate that risk. This paper extends the standard Campbell–Viceira (2005) strategic asset allocation model by including a longevity-linked investment possibility. Model estimation, based on prices for standardized annuities publicly offered by U.S. insurance companies, shows that aggregate shocks to survival probabilities are predictors for long-term returns of the longevity-linked securities, and reveals an unexpected predictability pattern. Valuation of longevity risk premium confirms that longevity-linked securities offer inexpensive funding opportunities to asset managers.