Information in Yield Spread Trades
No 2019-025, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US)
Using positions data on bond futures, I document that speculators' spread trades contain private information about future economic activities and asset prices. Strong steepening trades are associated with negative payroll surprises in subsequent months and can predict asset markets' reaction to future payroll releases, suggesting that speculators hold superior information about future payrolls. Steepening trades can also predict the rise of stock prices within a few hours before subsequent FOMC announcements, implying that the pre-FOMC stock drift is driven by informed speculation. Overall, evidence highlights spread traders' superior information and its important role in explaining announcement returns and pre-announcement drifts.
Keywords: Informed trading; Term structure; Business cycle; Pre-FOMC; Macroeconomic announcements (search for similar items in EconPapers)
JEL-codes: E32 E43 G12 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk, nep-mac and nep-mst
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