Abstract
The exposure of US Treasury bonds to the stock market has moved considerably over time. While it was slightly positive on average in the period 1960-2011, it was unusually high in the 1980s and negative in the 2000s, a period during which Treasury bonds enabled investors to hedge macroeconomic risks. This paper explores the e ects of monetary policy rules,monetary policy uncertainty, and macroeconomic shocks on nominal bond risks, using a New Keynesian model with habit formation and discrete regime shifts in 1977 and 2000. The increase in bond risks after 1977 is attributed primarily to a shift in monetary policy towards a more anti-inflationary stance, while the more recent decrease in bond risks after 2000 is
attributed to a renewed focus on output stabilization combined with decreased volatility of supply shocks and increased volatility of the Fed's long-run in ation target. Endogenous responses of bond risk premia amplify these e ects of monetary policy on bond risks.
