AQR Capital Management
2 Greenwich Plaza
Greenwich, CT 06830
Institutional Affiliation: AQR Capital Management
NBER Working Papers and Publications
|October 2018||Post-FOMC Announcement Drift in U.S. Bond Markets|
with Jordan Brooks, Hanno Lustig: w25127
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 ta...