Fiscal-Monetary Interactions: Pre-Announcement Liquidity Effects After Bond Issuance
75 Pages Posted: 23 Oct 2022 Last revised: 14 Feb 2023
Date Written: October 16, 2022
Abstract
UK government bond yields rise significantly in a two-day window before Monetary Policy Committee (MPC) meetings, with the majority of this yield drift attributed to increases in risk premia. These effects concentrate in pre-MPC windows that coincide with issuance of UK government bonds. Analysing granular transaction-level data surrounding bond issuance, we find that dealers sell significantly more of the new issue to their clients in pre-MPC windows, consistent with dealers’ limited risk-bearing capacity. Interestingly, we find significant changes in the composition of liquidity providers: hedge funds buy a large share of the new issue outside pre-MPC windows, but refrain from liquidity provision in pre-MPC windows, and are replaced by more passive investors such as foreign central banks and pension funds. We outline a simple model to rationalize these findings.
Keywords: Monetary Policy Announcements, Price Drift, Bond Supply, Informed Trading
JEL Classification: G11, G12, G14, D83, D84
Suggested Citation: Suggested Citation