This paper studies whether the evident statistical predictability of bond risk premia translates into economic gains … for investors. We propose a novel estimation strategy for a ne term structure models that jointly fits yields and bond … excess returns with high regressions R^2s and high forecast accuracy but cannot outperform the expectations hypothesis out …

we label Convergence Gap (CG), contains information that is valuable for bond predictability. Adding CG in forecasting … regressions of bond excess returns significantly raises the R-squared, and restores countercyclical variation in bond risk premia … the path of rates, our factor has predictive ability for real bond excess returns. The importance of the gap remains …