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Title: Bond Supply and Excess Bond Returns

Author(s): Robin Greenwood and Dimitri Vayanos

Publication Date: February 2008

Keyword(s): bond prices, limited arbitrage, preferred habitat and return predictability

Programme Area(s): Financial Economics

Abstract: We examine empirically how the maturity structure of government debt affects bond yields and excess returns. Our analysis is based on a theoretical model of preferred habitat in which clienteles with strong preferences for specific maturities trade with arbitrageurs. Consistent with the model, we find that (i) the supply of long- relative to short-term bonds is positively related to the term spread, (ii) supply predicts positively long-term bonds' excess returns even after controlling for the term spread and the Cochrane-Piazzesi factor, (iii) the effects of supply are stronger for longer maturities, and (iv) following periods when arbitrageurs have lost money, both supply and the term spread are stronger predictors of excess returns.

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Bibliographic Reference

Greenwood, R and Vayanos, D. 2008. 'Bond Supply and Excess Bond Returns'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6694