Cochrane and Piazzesi (2005) use forward rates to forecast future bond returns. We extend their approach by applying their model to international bond markets. Our results indicate that the unrestricted Cochrane and Piazzesi (2005) model has a reasonable forecasting power for future bond returns. The restricted model, however, does not perform as well on an international level. Our results do not confirm the systematic tent-shape of the estimated parameters found by Cochrane and Piazzesi (2005). The forecasting models are used to implement various trading strategies. These strategies exhibit high information ratios when implemented in individual countries or on an international level. We also introduce an alternative specification to forecast future bond returns. This alternative specification delivers superior risk-adjusted returns in our trading strategy.

Dr. Bernd Scherer, M.D., is Head of Quantitative GTAA at Morgan Stanley Investment Management and a Visiting Professor at Birkbeck College, London.

Co- Author Stephan Kessler is a senior researcher at Morgan Stanley Investment Management.