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

86 Pages Posted: 8 Oct 2018 Last revised: 26 Oct 2018

See all articles by Jordan Brooks

Jordan Brooks

AQR Capital Management, LLC

Michael Katz

AQR Capital Management, LLC

Hanno Lustig

Stanford University

Multiple version iconThere are 2 versions of this paper

Date Written: October 2018

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.

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Suggested Citation

Brooks, Jordan and Katz, Michael and Lustig, Hanno, Post-Fomc Announcement Drift in U.S. Bond Markets (October 2018). NBER Working Paper No. w25127, Available at SSRN: https://ssrn.com/abstract=3262389

Jordan Brooks (Contact Author)

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 Lustig

Stanford University

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