Government Bonds and the Cross-Section of Stock Returns

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Abstract
We study basic return comovement and predictability patterns in U.S. government bonds and the cross-section of stocks. Government bonds comove most strongly with bond-like stocks, i.e. stocks of large, mature, low-volatility, profitable, dividend-paying firms that are neither high growth nor distressed. Government bonds and bond-like stocks are also copredictable in the sense that time-series variables that predict returns on one asset class also predict returns on the other. In addition to traditional explanations for comovement and copredictability, the evidence is particularly consistent with the hypothesis that fluctuations in investor sentiment affect the demand for both bonds and bond-like stocks relative to the demand for speculative stocks.

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