An Inquiry into the Nature and Sources of Variation in the Expected Excess Return of a Long-Term Bond

This paper proposes an approach to study the expected excess return of a long-term bond and focuses on a lower bound. This lower bound is a crucial number, as it represents the minimum expected excess return demanded by investors. The derived bound is model-independent and can be extracted from options on the 30-year Treasury bond futures. Our implementation reveals that the annualized lower bound ranges from 0.22 to 6.07, with an unconditional average of 1.18%. The ideas and developed results are useful for thinking about cost of debt, allocation between equities and bonds, and measuring investor reaction to monetary policy shocks.