Bond Supply, Yield Drifts, and Liquidity Provision Before Macroeconomic Announcements

Abstract

UK government bond yields tend to rise in a two-day window before the scheduled arrival of news such as labour market data releases and monetary policy announcements. This effect, particularly pronounced during UK bond issuances, is linked to heightened risk premia. The evidence suggests that financial intermediary constraints play a role as dealers avoid accumulating inventory in pre-news windows with issuances. The composition of liquidity providers also changes: hedge funds buy a relatively large share of the new issue outside pre-news windows, but liquidity provision in pre-news windows is performed increasingly by more passive investors such as foreign central banks and pension funds. We outline a simple model to rationalize these findings.

Keywords: Macroeconomic Announcements, Yield Drift, Bond Supply, Liquidity Provision

JEL Classification: G11, G12, G14, D83, D84