We study time variation in expected excess bond returns. We run regressions of one-year excess returns on initial forward rates. We find that a single factor, a single tent-shaped linear combination of forward rates, predicts excess returns on one- to five-year maturity bonds with R2 up to . The return-forecasting factor is countercyclical and forecasts stock returns. An important component of the returnforecasting factor is unrelated to the level, slope, and curvature movements described by most term structure models. We document that measurement errors do not affect our central results
