Macroeconomic Announcements and Risk Premia in the Treasury Bond Market

The bond risk premia associated with important macroeconomic variables are examined in this paper. The main question is whether a risk premium is earned by risk-averse agents investing in Government bonds exposed to macroeconomic news. The news measures are based on macroeconomic announcements and mar-ket consensus forecasts covering more than twenty-\u85ve years of data (1983-2008) and more than twenty types of announcements. Procyclical variables are found to carry a statistically signi\u85cant price of risk. This result is con\u85rmed by examining both cross-sectional regressions and the expected returns of maximum-correlation portfolios mimicking the macroeconomic variables. This result is also robust con-trolling for the e¤ects of other risk factors. Advantages of using high frequency data are documented. The most important announcements in explaining the bond risk premia are the labor market and business con\u85dence announcements. One factor appears su ¢ cient to explain the cross-section of average returns on Government bonds. Time variation in the risk premia is also documented