Informed trading in government bond markets

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 05 June 2020

Staff Working Paper No. 871

By Robert Czech, Shiyang Huang, Dong Lou and Tianyu Wang

Using comprehensive regulatory data, we examine trading by different investor types in government bond markets. Our sample covers virtually all secondary market trading in gilts and contains detailed information on each transaction, including the identities of both counterparties. We find that hedge funds’ daily trading positively forecasts gilt returns in the following one to five days, which is then fully reversed in the following month. A part of this short-term return predictability is due to hedge funds’ ability to anticipate future demand of other investors. Mutual fund trading also positively predicts gilt returns, but over a longer horizon of one to two months. This return pattern does not revert in the following year and is partly due to mutual funds’ ability to forecast changes in short-term interest rates.

PDFInformed trading in government bond markets

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