When do you have the big moves in stocks and bonds in the US? If you think they are surrounding macroeconomic announcements, you would be wrong. The focus of both stocks and bonds are during the pre-announcement period of the Fed, the day before the FOMC meetings. In fact, most of the move in stocks in for the last few years has been during the pre-announcement period. The market receives excess returns before any announcement. This has been going on before QE and is well-documented in a NY Fed study. For the period since 1994, Fed policy is announced after the FOMC meeting just after 2:15 EST. The impact on stocks from 1994 through march 2011 has been, on average, 49 bps. The pre-FOMC effect represents about 80% of the excess returns in US stocks during this period. This could be compensation for non-diversifiable risk of a Fed announcement.
The pre-FOMC effect has also been especially strong for bonds since the Financial Crisis. With the following charts from Morgan Stanley, we can see that most of the 10 year moves is based on what happens pre-FOMC. Take out the pre-FOMC and there is a major increase in yields. Ex-FOMC meetings and you have yields right on top of the actual series.
The drift is focused on rallies or no change in a ratio of almost 2 to 1. Now this may change radically if the Fed moves to raising rates, but for the last few years, bond traders were not fighting the Fed and are just expecting more of the same in terms of loose policies. However, if this is a risk premium story, investors will still have to be compensated for the risk prior to the Fed announcement.
Regardless of the story, this research just further documents the focus on the risks associated with holding any asset prior to a Fed announcement. Providing clarity through announcements has concentrated the attention of investors around these key dates. Risk and uncertainty is concentrated in ways that perhaps were not expected when the Fed said it will provide more information disclosures at announcements.
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