A monthly update of Bond Risk Premiums

The bond risk premium is an important estimate of the expected excess return for the level of interest rates.  I define the average level as the average of  2,3,4,5,6,7,8,9,10,20/30-yr Treasury bonds.  The average excess return for the level of rates is the average of the excess returns for 2,3,4,5,6,7,8,9,10-yr Treasury bonds.

We can create many different estimates of the bond risk premium, but I choose only a few.  The Rebonato decomposition is one way we can see how return predicting factors work.  A by-product of such a decomposition is the conditional level distance and the conditional slope distance.  These are the distance of the level and slope of the yield curve away from those predicted by a trend variable like trend CPI and trend GDP.

The figure below shows the level of rates against that predicted by trend CPI and trend GDP. The conditional level distance is difference between the level of rates and that predicted.

The Cochrane-Piazzesi forward rate regression produces another return predicting factor, and this is plotted below.

The estimates of the bond risk premium found in this post can be downloaded from the download data page.  That file includes some of the estimates that result from the Rebonato decomposition, as well some of the trend factors one can use to create return predicting factors.  More detail on the Rebonato decomposition can be found here and here.