Inflation News Dominates Bond Prices, Risk Premiums Key Factor
The study looked at how real interest rates, inflation, and term premiums affect the prices of U.K. bonds. By analyzing different types of bonds, the researchers found that inflation news is crucial for both nominal and real bonds. Real-rate news doesn't have much impact. Future risk premiums strongly influence bond prices, but this influence is similar for both types of bonds. Inflation news is the main driver of unexpected bond returns, providing reliable information about inflation expectations.