Unconventional monetary policy and the behavior of shorts

Abstract

In November 2008, the Federal Reserve announced the first of a series of unconventional monetary policies, which would include asset purchases and forward guidance, to reduce longterm interest rates. We investigate the behavior of shorts, considered sophisticated investors, before and after FOMC announcements not fully anticipated in spot bond markets. Short interest in Treasury and agency securities declined prior to expansionary announcements, indicating shorts anticipated these surprises, and declined further after these announcements. The failure of shorts to reinstitute their positions after the last purchase announcement confirms that the Fed convinced sophisticated investors that interest rates would remain low. Unconventional monetary policy and long yields during QE1: Learning from the shorts