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

93 Pages Posted: 15 Dec 2017 Last revised: 21 Oct 2019

See all articles by Jordan Brooks

Jordan Brooks

AQR Capital Management, LLC

Michael Katz

AQR Capital Management, LLC

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 27, 2019

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. A model in which some investors slowly adjust their extrapolative expectations of future short rates can qualitatively match the dynamics of yields. We provide evidence from interest rate forecasts and mutual fund flows that is consistent with the sticky, extrapolative version of the expectations hypothesis. Short event windows around FOMC announcements will fail to detect the full response of long rates to news about short rates.

Keywords: monetary policy, mutual funds, FOMC announcements, slow-moving capital, term structure

Suggested Citation

Brooks, Jordan and Katz, Michael and Lustig, Hanno N., Post-FOMC Announcement Drift in U.S. Bond Markets (March 27, 2019). Stanford University Graduate School of Business Research Paper No. 18-2. Available at SSRN: https://ssrn.com/abstract=3086941 or http://dx.doi.org/10.2139/ssrn.3086941

Jordan Brooks

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Michael Katz

AQR Capital Management, LLC ( email )

Two Greenwich Plaza, 3rd Floor
Greenwich, CT 06830
United States
203 742 3854 (Phone)
203 742 3354 (Fax)

HOME PAGE: http://www.aqr.com

Hanno N. Lustig (Contact Author)

Stanford Graduate School of Business ( email )

Stanford GSB
655 Knight Way
Stanford, CA California 94305-6072
United States
3108716532 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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