17. As bonds age, they roll down the upward-sloping yield-curve and earn some rolldown return (capital gain owing to this yield change) if the yield-curve remains unchanged. A bond’s rolling yield, or horizon return, includes both the yield and the rolldown return given a scenario of no change in the yield-curve.

18. The one-period forward rate can proxy for the near-term expected return––albeit with a downward bias because it ignores the value of convexity––if the current yield-curve is not expected to change. Empirical studies show that the assumption of an unchanged curve is more realistic than the assumption that forward rates reflect expected future yields. Historically, current spot rates predict future spot rates better than current forward rates do because the yield changes implied by the forwards have not been realized, on average.

19. The historical performance of dynamic strategies that exploit the predictability of long-term bonds’ near-term returns is evaluated in Antti Ilmanen, “Forecasting U.S. Bond Returns,” Journal of Fixed Income (June 1997), pp. 22–37. The dynamic strategies have consistently outperformed static strategies that do not actively adjust the portfolio duration.

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