Relating Excess Bond Returns to Changes in Observed Yields

Summary

The document raises a fixed-income forecasting question: research on interest-rate predictability often models excess returns over short rates using zero-coupon curves and risk premia, while traders may work directly with observed bond yields. It asks whether predictability in those excess returns necessarily implies predictability in changes in bond yields, and whether that relationship can be established formally.

The question notes that bond prices and yields are mathematically related, so yield changes are connected to bond returns, but it does not provide a derivation, empirical test, or answer. Any conclusion would need to account for the bond’s characteristics, its horizon, and how the excess return is defined. The document is therefore useful as a framing of a modeling distinction, rather than as evidence that yield changes must be predictable whenever excess returns are.

Key ideas

• Interest-rate forecasting research may target excess returns over short rates rather than observed bond yields.
• A bond’s price and yield are related, but that fact alone does not settle whether their predictability is equivalent.
• The question asks for a formal link between excess-return predictability and yield-change predictability.
• The document poses the issue without supplying a proof or empirical results.

Tags

# bond yield forecasting


# bond yield forecasting












About the problem of interest rate forecasting I find various paper that address the problem from the perspective of risk premia and affine term structure model. For example Cochrane and Piazzesi (2005), see here: https://www.aeaweb.org/articles?id=10.1257/0002828053828581

In particular the forecast is about excess return, excess respect to short term rate in zero curve setting. However in real world, at least in my experience, fixed income traders work directly with bond yield and not with zero curve, and see directly the observed yield and not some "excess measure".

I know pretty well that bond price is mathematically related to bond yield and that, therefore, diff yield is related to bond return. However I don't know if predictability of some excess return in zero curve setting imply necessarily predictability of bond (diff) yield. Informally speaking it seems so but ... formally? Have you some proof? I looked for but never never find it.

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