[ARTICLE] The paper investigates bond return predictability, finding statistical but limited economic value, especially when using real-time macroeconomic data, and suggesting leverage enhances short-term predictability.

by Andras Fulop (ESSEC Business School), Junye Li, Runqing Wan

The paper examines statistical and economic evidence of out-of-sample bond return predictability for a real-time Bayesian investor who learns about parameters, hidden states, and predictive models over time. We find some statistical evidence using information contained in forward rates. However, such statistical predictability can hardly generate any economic value for investors. Furthermore, we find that strong statistical and economic evidence of bond return predictability from fully-revised macroeconomic data vanishes when real-time macroeconomic information is used. We also show that highly levered investments in bonds can improve short-run bond return predictability.

[Please read the research paper here]