Risk and Return in Government Bonds, with Matteo Leombroni and Adi Sunderam, 2026
As the risks of government bonds change over time, does this change the compensation that investors require for holding them? 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 market 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 returns 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.
Inflation and Treasury Convenience, with Anna Cieslak and Wenhao Li, 2025
- revise and resubmit Journal of Finance - supported by NSF grant 2149193 - BFI Summary - SSRN Link
We document that U.S. Treasury convenience moved positively with inflation during the inflationary second half of the 20th century but not before WWII or after 2000. A macro-asset pricing model explains this shift through two channels. Inflationary supply shocks raise the opportunity cost of holding money and money-like assets, endogenously increasing convenience yields. In contrast, exogenous liquidity demand shocks elevate convenience but depress consumption and inflation. Model estimates show that spikes in liquidity demand after 2000 account for the weaker convenience–inflation link and the emergence of negative bond-stock betas, distinguishing liquidity from non-liquidity demand shocks.
Global Hegemony and Exorbitant Privilege, with Pierre Yared, 2025
- revise and resubmit Review of Financial Studies - BFI Summary - FAZ (in German)
We present a dynamic two-country model in which military spending, geopolitical dominance, and government bond prices are jointly determined. The model reflects three facts: hegemons enjoy a funding advantage, this advantage rises with geopolitical tensions, and war losers devalue their debts more. In the model, greater bond revenue enables military investment, in turn increasing the safety value of bonds to international investors. Debt capacity strengthens the hegemon’s military and financial advantage but introduces steady-state multiplicity and fragility. With intermediate capacity, initial conditions determine the hegemon. However, with high capacity, self-fulfilling bond market expectations can trigger hegemonic transitions and geopolitical fragility.
A Model of Politics and the Central Bank, with Wioletta Dziuda, 2025
- revise and resubmit Journal of Economic Dynamics and Control -
We develop a model of the interaction between an independent central bank and a government seeking to win elections. We find that a hawkish central bank increases the incumbent’s chance of reelection. This leads governments to prefer more inflation-averse central bankers than is socially optimal, rationalizing the political success of inflation targeting. The incumbent's preference for an inflation-averse central bank arises from a desire to improve economic outcomes conditional on being re-elected, but to worsen them conditional on losing the election. The political selection implies that a hawkish central bank leads to higher but less volatile unemployment. Consistent with the model, panel evidence from developed countries shows incumbents are more likely to be re-elected when central banks adopt a single inflation mandate or when executives hold appointment powers over central bank governors.