Simulating Long-horizon Returns on Government Bonds


We outline a macro-finance model for simulating long-horizon returns on government bonds. We show how the determinants of return distributions change across different investment horizons, and discuss differences in prospective returns on long- and short-duration bonds. Using a realistic calibration, we show that it is unlikely that long-duration bond returns will match the experience in the last few decades. Assuming that macro trends are flat on average, the return distributions of short- and long-duration bonds are comparable, despite long-duration bonds earning a term premium. For long-duration bonds to generate returns closer to historical experience, long-term growth prospects would likely need to deteriorate from today’s levels.

Journal of Fixed Income, forthcoming