Danny Walker, Don Lu, Gabor Pinter, Semi Youthle
Government bond yields tend to drift higher in the days before UK monetary policy or data news. Over the past 20 years, this trend (the trend labelled “pre-news drift” has increased by 2 percentage points in total over that period. Drift concentrates on the news period before it coincides with the UK government’s bond issuance, but this is more common than before. Our analysis shows that dealers and hedge funds are reluctant to buy bonds when news is ongoing, which is driving yields. NEWS Pre-News drift can affect signal monetary policymakers drawn from market rates, which can affect the optimal timing of bond issuance. There are related details Working Paper.
Bond yields drift higher if monetary policy announcements or macroeconomic data news is expected
Once news is released, bond yields avoid news that tells investors something, particularly about monetary policy or the economy. That’s not surprising to anyone. It is less obvious that yields will move in a certain direction before news arrives. But that’s exactly what we’re looking at with historical data from the UK. This is the trend to label it as “pre-news drift.”
It analyzes the UK government’s bond yields since the Bank of England’s independence in 1997, focusing on the period leading up to the next monetary policy announcement. Monetary Policy Committee Inflation and labor market data released on – Both are scheduled for release and therefore are expected in the market.
Chart 1 shows that bond yields tend to drift upwards on average two days before news is released. They tend to drift out of these windows on the day. The previous drift was not small. This increased yield by 2 percentage points compared to a total decline of 6-7 percentage points since 1997. We show in our paper that drift is longer mature and large, and most are considered. Risk Premiernot monetary policy expectations. In this blog, we will provide an analysis of what lies behind drift.
Chart 1: Bond yields tend to rise over two days of financial policy announcements or macroeconomic data releases in the UK, and they fall outside of those periods
Source: Bank of England and ONS.
News Pre-News drift is concentrated in periods after DMO issues government bonds
Pre-News Drift appears to be related to the timing of UK government bond issuance. Debt Management Office (DMO). The pre-news drift shown in chart 1 occurs almost entirely in the previous news window where bond is issued ahead. This could mean, for example, Windows following the issue of bonds on Tuesday followed by either the labour market data release on Wednesday or the monetary policy announcement on Thursday (or both).
Simple regression detailed in paper – Controlling other related factors – Daily changes in UK yields over 10 and 20 years in the pre-news window reveals that on average, about 0.5 basis points greater than changes in yields outside the pre-news window. It can be thought of as a baseline. However, this difference rises to 1.1 basis points if bonds are issued before the pre-news window. Cumulative of these small differences in daily yield changes over the years explains the much larger 2% point upward drift highlighted in Chart 1.
Once news arrives, you might expect pre-news drift to relax. Otherwise, your yields will be permanently high. Use regression to analyze this paper And over the next few days, no clear evidence of pre-news drift reversal is found. But of course, this doesn’t rule out that it’s happening. The reversal coincides with downward drift for the other periods shown in Chart 1.
Events where news of monetary policy and macroeconomic data is increasingly commonplace
The issuance of UK government debt has increased over the past few decades – All published It averaged £26 billion in the 1990s and £140 billion in the 2010s. This means that there will be more and more periods of time that DMOs will precede the release of monetary policy and release of macroeconomic data.
Chart 2 shows that in a few years all monetary policy announcements will precede the issuance of DMO bonds. These trends mean that pre-news drift discussed in this blog is a key feature of the bond market and perhaps remains.
Chart 2: It is becoming increasingly common for financial policy decisions or macroeconomic data to be released two days before the issue of UK government bonds
Source: Bank of England, DMO, ONS.
The limited intermediary ability of dealers and hedge funds explains drift
Why does news drift occur? Our analysis shows that the answers stem from the behavior of financial intermediaries like investment banks – or dealer – and hedge funds. Recent work It emphasizes the importance of balance sheet constraints for bond market dynamics. UK bond market dealers are responsible for purchasing shares of newly issued government bonds and are likely to sell to other investors. But we use Transaction-level data If news is expected, to show that dealers don’t want to hold too many bonds in case the news causes a sudden price drop. As a result, they rush to sell bonds purchased at auction, pushing down and driving the prices down.
Our analysis also points to changes in WHO intervention to buy bonds during pre-news periods. Hedge funds, which are usually active buyers, tend to pull back because they want to avoid committing to positions that may need to approach news events. Instead, active investors such as pension funds take on a bigger role. These investors will help maintain market liquidity, but can request higher returns to take risks during these periods and drive again.
Is Pre-News Drift just the UK?
There is a temptation to assume that News Pre-News Drift reveals something unique about the UK government bond market. Certainly, a Recent research Yields showed floating in the opposite direction (downward) around the US Federal Reserve (FOMC) monetary policy announcement. This is inconsistent with the analysis at face value. However, Chart 3 shows that the US Treasury publication (blue line on the chart) drifts upwards as it does in the UK when it focuses on the previous FOMC announcement. This suggests that similar market dynamics may be active in the US.
Chart 3: US bond yields tend to fall around federal policy announcements, but those announcements rise when US Treasury issuance ahead
Source: Bank of England.
Impact on policy
News Pre-News Drift influences financial and fiscal policymakers, revealing narrow channels where financial and fiscal policy interact. First, pre-news drift can contaminate the signal that monetary policymakers should withdraw from market interest rates. Using averaging periods for market rates helps avoid excessive emphasis on short-term volatility of rates. However, if this continues, drift could create the need for policymakers to change policy decisions and offset changes in market rates that do not reflect economic outlook. In line with this, our paper shows that following New Neves’ drift, there is a tendency for a major market rate movement in relation to monetary policy announcements to continue. Second, it has an impact on how the issuer determines the socially optimal timing of government bond issuance. It may make sense to avoid a period of impending news.
Danny Walker works in the governor’s office, Don Lu is a professor at the London School of Economics, hkust and Gabor Pinter are economists at the International Village Bank, and Semi Youthle is a professor at Johns Hopkins University.
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