Risk and Return in Government Bonds -- by Matteo Leombroni, Carolin Pflueger, Adi Sunderam

Does the compensation investors require for holding government bonds vary with their risk? We measure expected excess returns using market yields and professional forecasts of future yields, showing that they are tightly linked to a standard measure of risk: bonds’ betas with respect to the stock market. In a month-by-maturity panel of U. S. Treasuries from 1988 to 2024, the correlation between expected excess returns and bond–stock betas is 67%. The correlation is driven by variation in market yields rather than forecasters’ expectations. The relationship between realized excess returns and betas is weak in a univariate regression, but it becomes economically large and significant when we control for monetary-policy and macroeconomic forecast errors. Similar results obtain in an international panel of developed countries from 1989 to 2024. Our findings suggest that variation in risk premia driven by changing bond risk accounts for more than half of both the decline in U.S. long-term bond yields since the mid-1980s and their increase since 2020. Acknowledgements and Disclosures We thank Nick Bloom, John Campbell, Mike Golosov, Hanno Lustig, Alan Moreira, Kelly Shue (discussant), Andrea Vedolin (discussant), and Luis Viceira for helpful comments. We thank seminar participants at the Stanford SITE conference, MIT Sloan, Chicago Booth, DePaul University, Boston College, Boston University, NYU Stern, Columbia SIPA, the Princeton Macro-Finance Conference, the NBER Asset Pricing Summer Institute, and the Texas Macroeconomics conference for helpful comments. The views expressed here are those of the authors and do not necessarily reflect the views of others in the Federal Reserve System. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. We thank Nick Bloom, John Campbell, Mike Golosov, Hanno Lustig, Alan Moreira, Kelly Shue (discussant), Andrea Vedolin (discussant), and Luis Viceira for helpful comments. We thank seminar participants at the Stanford SITE conference, MIT Sloan, Chicago Booth, DePaul University, Boston College, Boston University, NYU Stern, Columbia SIPA, the Princeton Macro-Finance Conference, the NBER Asset Pricing Summer Institute, and the Texas Macroeconomics conference for helpful comments. The views expressed here are those of the authors and do not necessarily reflect the views of others in the Federal Reserve System. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. Citation and Citation Data Copy Citation Matteo Leombroni, Carolin Pflueger, and Adi Sunderam, "Risk and Return in Government Bonds," NBER Working Paper 35973 (2026), https://doi.org/10.3386/w35973. Copy to Clipboard Download Citation MARC RIS BibTeΧ Download Citation Data In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals—the NBER Reporter, the NBER Digest, the Bulletin on Health, the Bulletin on the Economics of Alzheimer's, and the Bulletin on Entrepreneurship—as well as research spotlights, lectures, and panel videos. Presenters: Melissa Dell & Ashesh Rambachan Presenter: Paul Goldsmith-Pinkham