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

Jordan Brooks, Michael Katz, Hanno Lustig

NBER Working Paper No. 25127
Issued in October 2018, Revised in April 2019
NBER Program(s):The Asset Pricing Program, The Monetary Economics Program

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.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Supplementary materials for this paper:

• data appendix

Acknowledgments and Disclosures

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w25127