Post-FOMC Announcement Drift in U.S. Bond Markets

Jordan Brooks (), Michael Katz and Hanno Lustig

No 25127, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The sensitivity of long-term rates to short-term rates represents a puzzle for standard macro-finance models. Post-FOMC announcement drift in Treasury markets after Federal Funds target changes contributes to the excess sensitivity of long rates. Mutual fund investors respond to the salience of Federal Funds target rate increases by selling short and intermediate duration bond funds, thus gradually increasing the effective supply to be absorbed by arbitrageurs. The gradual increase in supply generates post-announcement drift in longer Treasury yields, which spills over to other bond markets. Our findings shed new light on the causes of time-series-momentum in bond markets. A model in which mutual fund investors slowly adjust their extrapolative expectations of future short rates after a target change can qualitatively match the dynamics of yields and fund flows.

JEL-codes: E43 G12 (search for similar items in EconPapers)
Date: 2018-10
New Economics Papers: this item is included in nep-fmk, nep-mac and nep-mon
Note: AP ME
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Citations: View citations in EconPapers (20)

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