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Bond Supply and Excess Bond Returns

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  • Robin Greenwood
  • Dimitri Vayanos

Abstract

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.

Suggested Citation

  • Robin Greenwood & Dimitri Vayanos, 2014. "Bond Supply and Excess Bond Returns," The Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 663-713.
    • Handle: RePEc:oup:rfinst:v:27:y:2014:i:3:p:663-713.
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    File URL: http://hdl.handle.net/10.1093/rfs/hht133
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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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