Too Big to Ignore? Hedge Fund Flows and Bond Yields

42 Pages Posted: 9 Nov 2014 Last revised: 21 Dec 2017

See all articles by Olga Kolokolova

Olga Kolokolova

University of Manchester - Alliance Manchester Business School

Ming-Tsung Lin

University of Essex

Ser-Huang Poon

University of Manchester - Manchester Business School

Date Written: December 21, 2017

Abstract

This paper investigates the information content of aggregate hedge fund flow and its predictive power with respect to bond yields. Using a sample of 9,725 hedge funds from 1994 to 2012, we find that fund flow is negatively related to the changes in 10-year Treasury and Moody's Baa bond yields one month ahead. The relation is still pronounced after controlling for other determinants of yield changes, including the amount of arbitrage capital available in the economy, suggesting a non-trivial effect of flow-induced hedge fund trading on bond yields. Flow impact on corporate bonds is further amplified during periods of decreasing market liquidity, consistent with a fire-sale hypothesis. Hedge fund flow also predicts convergence between constant maturity swap rate and constant maturity Treasury rate, as well as between the TIPS and Treasury bond yields, suggesting that hedge funds exploit arbitrage opportunities in these fixed-income markets.

Keywords: Hedge Funds, Flows, Price Impact, Bond Yields, Liquidity

JEL Classification: G10, G23

Suggested Citation

Kolokolova, Olga and Lin, Ming-Tsung and Poon, Ser-Huang, Too Big to Ignore? Hedge Fund Flows and Bond Yields (December 21, 2017). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2520510 or http://dx.doi.org/10.2139/ssrn.2520510

Olga Kolokolova (Contact Author)

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom
+441613062081 (Phone)

Ming-Tsung Lin

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

HOME PAGE: http://https://www.essex.ac.uk/people/linmi48001/ming-tsung-lin

Ser-Huang Poon

University of Manchester - Manchester Business School ( email )

Crawford House
Oxford Road
Manchester, Manchester M13 9PL
United Kingdom
+44 161 275 4031 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.manchester.ac.uk/research/Ser-huang.poon/

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