Research and publications

Predicting Risk Premia for Treasury Bonds: The ERI Risk Premium Monitor

Investors in the Treasury market often observe an upward-sloping yield curve.1 This means that, by assuming ‘duration risk’, they can very often invest at a higher yield than their funding cost ...

Author(s) :

Riccardo Rebonato

Summary :

Investors in the Treasury market often observe an upward-sloping yield curve.1 This means that, by assuming ‘duration risk’, they can very often invest at a higher yield than their funding cost. Yet, if the Expectation Hypothesis held true — if, that is, the steepness of the yield curve purely reflected expectations of future rising rates — no money could on average be made from this strategy. This prompts the obvious question: When does the steepness of the yield curve simply reflects expectations of rising rates, and when does it embed a substantial risk premium?

Type : Working paper
Date : 01/09/2017