This paper investigates the information content of aggregate hedge fund flow and its predictive power with respect to bond yields. Dollar flows seem to capture the direct price impact, and percentage flows proxy for shifts in investor preferences. Dollar inflows to the largest 25% of funds predict decrease in Treasury bonds yields one month ahead, indicating that such funds may (temporarily) ''park'' new capital in safe bonds. Dollar outflows from these funds are followed by increasing yields of both government and corporate bonds, suggesting that funds liquidate their bond portfolios to meet their liquidity needs. Percentage outflow predicts decrease in Treasury bond yields, consistent with investor flight to safety. The strongest predictive power is associated with funds imposing short notice period prior to redemption.
|Publication status||Published - 16 Mar 2015|