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The Yield Spread and Bond Return Predictability in Expansions and Recessions

Review of Financial Studies 2021 34(6), 2773-2812 open access
This paper uncovers that expected excess bond returns display a positive correlation with the slope of the yield curve (i.e., yield spread) in expansions but a negative correlation in recessions. We use a macro-finance term structure model with different market prices of risk in expansions and recessions to show that a very accommodating monetary policy in recessions is a key driver of this switch in return predictability.