Working Paper

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.

Keywords: Informed trading; Term structure; Business cycle; Pre-FOMC; Macroeconomic announcements;

JEL Classification: E32; E43; G12; G14;

https://doi.org/10.17016/FEDS.2019.025

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2019-04-12

Number: 2019-025

Pages: 38 pages