Exploring the Influence of Anticipated News on Government Bond Yields

Danny Walker, Dong Lou, Gabor Pinter, and Semih Üslü

In the UK bond market, a pattern referred to as 'pre-news drift' is evident: yields tend to increase leading up to important monetary policy announcements or macroeconomic data releases. Over the past two decades, this trend has cumulatively raised yields by approximately 2 percentage points. The analysis indicates a correlation between this drift and the timing of UK government bond issuances, suggesting that market participants—particularly dealers and hedge funds—are hesitant to acquire bonds as critical news approaches.

The Mechanics Behind Pre-News Drift

Yields on government bonds are known to fluctuate with the announcement of significant economic news. However, the tendency of yields to drift higher in anticipation of such news is less intuitive. Historical data since the Bank of England's independence in 1997 reveals that yields generally increase in the two days preceding monetary policy announcements and data releases from the Office for National Statistics (ONS). In contrast, outside these windows, yields tend to decline.

Figure 1 illustrates an upward drift in yields during pre-news periods, a trend that accumulated to a noticeable 2 percentage point increase, juxtaposed against an overall decline of 6 to 7 percentage points since 1997. Notably, this pre-news drift is more pronounced for longer-dated bonds and is primarily driven by risk premiums rather than changes in monetary policy expectations.

Sources: Bank of England and ONS.

Link to Bond Issuance Timing

A key element of the pre-news drift is its correlation with the timing of bond issuance by the UK Debt Management Office (DMO). The data indicates that pre-news drifts frequently occur after the DMO has released new government bonds. For instance, a scenario where bonds are issued on a Tuesday, followed by a labor market data release on Wednesday or a monetary policy announcement on Thursday, would likely see increased yields as the news approaches.

Further regression analysis shows that daily changes in yields for 10 and 20-year UK bonds during these pre-news periods average an increase of 0.5 basis points compared to changes outside these periods. This increase can rise to as much as 1.1 basis points following a bond issuance, contributing to the significant overall drift in yields.

Interestingly, while one might expect the pre-news drift to reverse after the news is released, the findings indicate a lack of clear evidence supporting such a reversal. This absence of a reversion might hint at persistent market behaviors beyond the immediate news cycle.

Increasing Frequency of Coinciding Events

The issuance of UK government debt has notably intensified in recent years. Between the 1990s and the 2010s, gross issuance jumped from an average of £26 billion to £140 billion. This increase has led to more instances where monetary policy decisions or data releases coincide closely with bond issuance. Figure 2 demonstrates that in some recent years, every monetary policy announcement was preceded by DMO bond issuance, solidifying the pre-news drift as a fixture within the bond market landscape.

Sources: Bank of England, DMO, and ONS.

Market Behavior and Intermediation Capacity

What accounts for the pre-news drift? The behavior of financial intermediaries—specifically dealers and hedge funds—plays a crucial role. During anticipated news periods, these intermediaries often face balance sheet constraints that discourage them from maintaining substantial bond inventories, fearing sharp price drops post-announcement. Consequently, they tend to offload bonds purchased during auctions, which consequently drives prices down and yields up.

Additionally, the analysis indicates that hedge funds, typically active in the bond market, often reduce their participation in pre-news periods. This retreat allows less active investors, like pension funds, to fill the gap. While these investors help to sustain market liquidity, they require higher returns to compensate for the increased risk, thereby further elevating yields.

Comparative Analysis with Other Markets

While the concept of pre-news drift appears distinct to the UK, comparisons with the US bond market indicate similar dynamics. It is notable that a recent study highlights how US bond yields generally decrease around Federal Reserve monetary policy announcements. However, when those announcements follow US Treasury issuances, a similar upward drift in yields occurs, suggesting parallel mechanisms might be influencing both markets.

Source: Bank of England.

Implications for Policy and Timing

The persistence of pre-news drift brings to light important considerations for policymakers. First, it may distort the signals derived from market interest rates, compelling monetary authorities to recalibrate their decisions to counteract changes driven by factors not reflective of the economic environment. Our paper indicates that the pre-news drift is frequently followed by more pronounced rate movements around key policy announcements.

Second, these insights suggest that issuers might be better served by timing their bond issuance to avoid overlap with upcoming news events, a strategy that could facilitate more favorable market conditions absent the tension of impending announcements.

These findings not only shed light on the behavior of government bonds in the UK but also suggest a broader influence of anticipated news on financial markets globally, meriting further investigation.

Danny Walker works in the Governors’ offices, Dong Lou is a professor at the London School of Economics and HKUST, Gabor Pinter is an economist at the Bank for International Settlements, and Semih Üslü is a professor at Johns Hopkins University.

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