Finance and Economics Discussion Series (FEDS)
April 2019
Information in Yield Spread Trades
Abstract:
Using positions data on bond futures, I document that speculators' spread trades contain private information about future economic activities and asset prices. Strong steepening trades are associated with negative payroll surprises in subsequent months and can predict asset markets' reaction to future payroll releases, suggesting that speculators hold superior information about future payrolls. Steepening trades can also predict the rise of stock prices within a few hours before subsequent FOMC announcements, implying that the pre-FOMC stock drift is driven by informed speculation. Overall, evidence highlights spread traders' superior information and its important role in explaining announcement returns and pre-announcement drifts.
Accessible materials (.zip)
Keywords: Business Cycle, Informed Trading, Macroeconomic Announcements, Pre-FOMC, Term Structure
DOI: https://doi.org/10.17016/FEDS.2019.025
PDF: Full Paper