The FOMC announcement returns on long-term US and German bond futures

Abstract

• We examine the impact of FOMC announcements on long-term US and German government bond futures. • Using transaction-level data during the post–financial crisis period, we observe a sizable post-announcement drift in government bond markets. • A trading strategy yields up to four times the Sharpe ratio of buy-and-hold investment. • The post-FOMC drift coincides with more informative order flows in the post-announcement period. • Post-FOMC announcement drift in the government bond futures persists for 15 days. We examine the impact of monetary policy announcements by the Federal Open Market Committee (FOMC) on long-term US and German bond futures. Using transaction-level data during the post-financial crisis period, we observe a sizable post-announcement drift in government bond markets. A trading strategy of investing in the market after expansionary shocks and shorting the market following contractionary surprises yields up to four times the Sharpe ratio of buy-and-hold investment. The post-FOMC announcement drift coincides with more informative order flows in the post-announcement period, and it persists for 15 days. Moreover, our study shows an absence of pre-FOMC announcement drift. Our findings shed some light on how the bond markets react to public news arrival.