Abstract:

As the risks of government bonds change over time, does the compensation that
investors require for holding them change? While realized excess returns show little
relation to bond risk, we find that subjective expected excess returns constructed from
professional forecasts of future long-term yields are tightly linked to bonds’ stock mar-
ket betas, consistent with a CAPM-style relation. In a U.S. month-by-maturity panel
from 1988–2024, the correlation of subjective excess returns with rolling bond–stock
betas is 66%. The estimated market price of risk is comparable to the equity premium
and stable when controlling for time and maturity fixed effects. Realized excess re-
turns are predicted by subjective excess returns, but this predictability is driven by
higher-frequency variation and not by betas. Similar results hold in an international
panel of developed countries from 1989–2024. The change in betas from positive to
negative accounts for half of the decline in long-term U.S. Treasury yields from the
1980s to the 2010s and implies a negative term premium as early as 2001. During
quantitative easing episodes, the price of bond risk declines, suggesting an increased
investor willingness to bear risk.