What Moves the Bond Market?

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What Moves the Bond Market?

• Fleming and Remolona

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Introduction

• The goal is to identify the factors that may
  explain large price changes and large surges in
  trading activity in the bond market.
• To that end, the authors instrument statistical
  exercises to determine the association between
  bond market movements and announcements of
  economic indicators.

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Structure of the Document

• Anecdotal Evidence
• Correlation of price changes and trading surges
  with release times of macroeconomic conditions.
• Formal Analysis
• Econometric exercise to evaluate the impact of
• Type of announcement
• Magnitude of the surprise element
• Market conditions

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Methodology and Data

• The bond market is represented with the five-year
  U.S. Treasury note.
• High-frequency intraday data for bond market
  activity is employed.
• Dates and release times for 21 economic
  indicators.
• The sample period is from August 23, 1993 to
  August 19, 1994.

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Anecdotal Evidence
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Econometric Analysis

• Run a regression
• Dependent variables
• Price volatility as measured by the percentage
  change in the five minute interval following an
  announcement.
• Trading activity number of transactions during
  the one-hour interval following the announcement.
• Independent variables
• Announcement dummy variables.

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Announcement Surprises

• Add to the regression a variable to measure the
  surprise component of announcements

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Market Conditions

• Introduce two measures of uncertainty
• Volatility derived from options on then-year U.S.
  Treasury notes.
• Expected change in the fed funds rate.

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Conclusions

• Each of the 25 sharpest price changes and
  greatest trading surges are associated with a
  just-released announcement.
• The largest responses are correlated, in order of
  importance, with the employment report, producer
  price index, federal funds target rate, and the
  consumer price index.
• Bond market activity responds significantly to
  the surprise component of announcements and
  market conditions.