Informed and Strategic Order Flow in the Bond Market

Abstract:     
We analyze the role private and public information play in the U.S. Treasury bond price discovery process. To guide our analysis, we develop a parsimonious model of speculative trading in the presence of two realistic market frictions, information heterogeneity and imperfect competition among informed traders. We test its equilibrium implications by studying the response of 2-year, 5-year, and 10-year U.S. bond yields to order flow and real-time U.S. macroeconomic news. Consistent with the stylized model, we find that unanticipated order flow explains a bigger portion of bond yield changes when the dispersion of beliefs across informed traders is high and public announcements are noisy.

Keywords: Macroeconomic news announcements, strategic trading, market microstructure, order flow, real-time data, expectations, dispersion of beliefs

JEL Classifications: E44, G14

Working Paper Series