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. Yet, if the Expectation Hypothesis held true — if, that is, the steepness of the yield curve purely reflected expectations of future rising rates —...
Author(s)
Riccardo Rebonato

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?

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