Australian Bond Excess Returns: An Asset Allocation Perspective

We examine the out-of-sample predictability of excess returns in the Australian government bond market. Our results confirm previous findings that a linear combination of forward rates provides a statistically significant prediction of bond excess returns on 1- to 5-year maturity bonds. However, from an asset allocation perspective, our predictive model fails to obtain positive economic utility against the no-predictability benchmark. Our results are robust to the sample period and different parameter assumptions.