Do macro announcements still drive the US bond market?

In the 1990s, the sharpest movements in the price of US Treasury securities tended to take place at release times of macroeconomic announcements. In theory, the yield on (and thus the price of) a default-free, fixed income security reflects the financial market’s view of the future path of risk-free short-term interest rates over the remaining life of the instrument. In turn, the most fundamental influences leading to changes in the market’s expectation of future short rates are macroeconomic developments that induce changes in beliefs regarding future real interest rates or inflation, including beliefs about shifts in monetary policy. Consistent with this view, Fleming and Remolona (1999) find that each of the 25 largest short-term price movements in the five-year US Treasury note during the one-year period from August 1993 to August 1994 was associated with a macroeconomic announcement. An alternative view suggests that yields on default-free securities might fluctuate because of liquidity-driven movements in the demand for fixed income securities relative to other assets. For example, volatility in equity prices might generate short-term portfolio flows between the equity and bond markets. Such demand-related influences would be expected to be most prevalent in relatively illiquid markets. Although it still ranks among the most liquid markets in the world, Fleming (2000) has documented that, according to various measures, the US Treasury market has witnessed a decline in liquidity in recent years, in part due to reduced issuance. The combination of higher equity price volatility and lower Treasury market liquidity has led some to assert that bond market movements are driven less by macroeconomic developments than was previously the case. In this special feature, we explore the extent to which macroeconomic announcements and large, short-run equity price movements are associated with large, short-run changes in the price of the five-year US Treasury note during the calendar year 1999.21 The analysis yields five basic results. First, we find that the largest short-term price movements in the Treasury market were still associated with macroeconomic announcements, but the set of announcements having large impacts was broader than before. Second, announcements continued to be associated with higher than average price volatility. Third, the surprise content of announcements in 1999 was smaller than before. Fourth, the price response to surprises in non-farm payrolls, the single most important announcement, was no longer consistent in sign although the price response to inflation surprises was similar to that previously found. Finally, we find no evidence that large equity price changes drove bond price movements in 1999.