Bond Supply and Excess Bond Returns

Robin Greenwood; Dimitri Vayanos

doi:10.1093/rfs/hht133

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Bond Supply and Excess Bond Returns

Robin Greenwood¹; Dimitri Vayanos²

¹ Dana-Farber/Harvard Cancer Center · ² Center for Economic and Policy Research

Review of Financial Studies 2014

We examine empirically how the supply and maturity structure of government debt affect bond yields and expected returns. We organize our investigation around a term-structure model in which risk-averse arbitrageurs absorb shocks to the demand and supply for bonds of different maturities. These shocks affect the term structure because they alter the price of duration risk. Consistent with the model, we find that the maturity-weighted-debt-to-GDP ratio is positively related to bond yields and future returns, controlling for the short rate. Moreover, these effects are stronger for longer-maturity bonds and following periods when arbitrageurs have lost money.

DOI: 10.1093/rfs/hht133
Volume: 27 (3)
Pages: 663-713
Language: en
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