Title: Return predictability in the treasury market
Description: This paper decomposes excess return predictability in U.S. and U.K. inflation-indexed and nominal government bonds. We find that nominal bonds reflect time-varying inflation and real rate risk premia, while inflation-indexed bonds reflect time-varying real rate and liquidity risk premia. These three risk premia exhibit quantitatively similar degrees of time variation. We estimate a systematic liquidity premium in U.S. inflation-indexed yields over nominal yields, which declined from 100 bps in 1999 to 30 bps in 2005 and spiked to over 150 bps during the crisis 2008-2009. We find no evidence that shocks to relative inflation-indexed bond issuance generate return predictability.