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introduction: This paper studies the response of the prices of U.S. Treasury bonds to public announcements of economic news. We use data on scheduled economic announcements and consensus forecasts to calculate the surprise component in the announcement. These data, together with intraday price information, allow us to differentiate between contemporaneous announcements and to determine which announcements significantly affect prices and the size and sign of the price response, as well as how quickly public news is incorporated into Treasury prices. In addition to price data, our data set contains information on trading volume and bid-ask spreads, enabling us to investigate the effects of different announcements on trading activity.The main findings of our analysis can be summarized as follows. First, we find that 17 news releases, as measured by the surprise in the announced quantity, have a significant impact on the price of at least one of the following instruments: a three-month bill, a two-year note, a 10-year note, and a 30-year bond. Second, these effects vary significantly according to maturity. While nine announcements affect the price of the T-bill, 13 announcements affect the price of the two-year note, 16 announcements affect the price of the 10-year note, and 10 announcements affect the price of the 30-year bond. Third, public news explains a substantial fraction of price volatility in the aftermath of announcements, and the adjustment to news generally occurs within one minute after the announcement. Fourth, both trading volume and volatility increase immediately after the announcements and persist for up to 60 minutes after the announcements. Finally, bid-ask spreads widen at the time of the announcements, but then revert to normal values after five to 15 minutes.Our findings have relevant implications for models of the yield curve and of interest rate dynamics. We show that the differential impact of news on instruments of different maturity is consistent with at least two factors of uncertainty being at work in the term structure. Moreover, the almost instantaneous adjustment of prices to public news suggests that jumps are a needed component of realistic time-series models of interest rates.Our findings also have implications for the microstructure of bond markets. The fact that prices move significantly, before the increase in volume, suggests that the initial price adjustment is mainly driven by public information. The widening of bid-ask spreads for up to 15 minutes after the announcements suggests that during a second phase, both volatility and volume are partly driven by informed trading. Finally, the persistence of volatility and volume beyond the reversion of bid-ask spreads to normal suggests that liquidity trading plays a role during a third phase after the news releases.This paper extends the analysis of other articles looking at intraday patterns in Treasury bond prices and trading around announcement times. Ederington and Lee (1993), for example, study price volatility in the futures markets. Futures data has several disadvantages: i) futures contracts have delivery options that complicate the analysis, ii) futures market data do not contain bid-ask and trade volume information, and iii) futures markets are closed at the time when some important announcements are made (i.e., the 4:30PM money supply announcements).Fleming and Remolona (1999) study price volatility and trading behavior by using data from the secondary market for U.S. Treasury securities. Our analysis extends theirs in that we consider a much broader set of macroeconomic announcements (26 instead of three), a longer sample period (five years instead of one year), and a broader set of Treasury instruments (four instead of one). We also distinguish between different types of announcement and the different components of the announcements, while Fleming and Remolona pool together the three announcements that they consider (PPI, CPI, and employment report). Moreover, Fleming and Remolona do not separate the different components of the announcements (Nonfarm Payrolls and Civilian Unemployment within the employment report). Finally, we relate price changes to the surprise component of the announcement, whereas Fleming and Remolona, like Ederington and Lee (1993), only investigate overall volatility effects.

A. Bond Prices

Our primary data set contains bid and ask quotes, trade prices, and trading volume for Treasury bills, notes, and bonds in the interdealer broker market. The data set covers the period from July 1, 1991, to September 29, 1995, and includes data over all 24 hours.1

According to the Federal Reserve Bulletin (September 1993), roughly 62% of the March-May 1993 Treasury security transactions in the secondary market occurred among dealers; that is, within the inner market. Treasury dealers trade with one another mainly through intermediaries, called interdealer brokers. Six of the seven main interdealer brokers2 provide price information to the firm GovPX (the exception is Cantor Fitzgerald). In turn, GovPX provides price information directly to Treasury bond dealers and to other traders through financial news providers, such as Bloomberg. Daily trading volume in the most recently issued securities, "on-the-run" or "active" issues, is measured in the billions of dollars, and the number of transactions in the active issues recorded by GovPX is 300 to 700 a day.Dealers leave finn quotes with the brokers, along with the minimum size that they are willing to trade. The best quotes across all the participating primary dealers, as well as the size of the order the quotes are good for, are posted on the GovPX screen. Thus, the posted quotes are also the prices at which actual trading takes place. At a minimum, these quotes are good for $1 million, and normal units are in millions of dollars. B. Survey and Announcement Data

The data on economic announcements and expectations are from Money Market Services (MMS), a San Francisco-based corporation, which has conducted telephone surveys since late 1977. The MMS data are the most commonly used data in studies of economic announcements. Edison (1996), Hakkio and Pearce (1985), Ito and Roley (1987), Hardouvelis (1988), McQueen and Roley (1993), and Urich and Wachtel (1984) are some of the many previous studies that have used the MMS data to calculate the surprise component in economic announcements.

The properties of the MMS forecasts have been investigated, for example, by Pearce and Roley (1985). They consider forecasts of money supply, industrial production, unemployment, PPI, and CPI. They find a significant bias only in the industrial production forecasts. They also note that the MMS forecasts are more accurate than forecasts produced by autoregressive models by virtue of lower mean squared errors.3

The 26 economic news announcements that we consider are shown in Table 1.4 This is a more comprehensive set of economic announcements than in any existing study. As Table 1 shows, 12 of the announcements occur at 8:30AM, two at 9:15AM, eight at 10AM, one at 2PM, and three at 4:30PM. Most of the announcements are made monthly, although Ml, M2, M3, and Initial Jobless Claims figures are announced weekly. Table 1 shows the number of times an announcement coincided with another announcement. For example, Nonfarm Payrolls and the Civilian Unemployment rate are always announced at the same time. Table 1 also reports the units used to measure the announced figures. Levels are reported as units, dollars, or percentages. Changes are reported as either absolute in units or dollars, or as a percentage change from the previous observation. III. Economic News and Bond PricesThis section explains the methodology used to evaluate the impact of the different announcements on bond prices. We then study which announcements have a significant effect on bond prices, the speed at which new information is incorporated into prices, and the size of the effect of the various announcements.

Which Economic Announcements Affect Prices? Table 2 presents the estimation results for the four instruments: three-month bill, two-year note, 10-year note, and 30-year bond. The table shows slope coefficients, t-statistics, and R^sup 2^ estimates. Intercept terms are not reported, since they are rarely significant. For example, in the case of the 10-year note, only three of the 26 intercept terms are significant. The main results follow. First, the prices of all four instruments react significantly9 to eight announcements. These eight announcements are: Durable Goods Orders, Housing Starts, Initial Jobless Claims, Nonfarm Payrolls, Producers Price Index, Consumer Confidence, NAPM Index, and New Home Sales. In addition, three announcements affect the prices of three instruments, Consumer Price Index and M2, the longest three and Retail Sales, the shortest three. One announcement, Capacity Utilization, only affects the price of the two intermediate notes. Four other announcements, Merchandise Trade Balances, U.S. Imports, Industrial Production, and Factory Orders, only affect the price of the 10-year note. Finally, one announcement, Civilian Unemployment, only affects the price of the two-year note.In summary, nine announcements significantly affect the price of the T-bill, 13 announcements affect the price of the two-year note, 16 announcements affect the price of the 10-year note, while 10 announcements affect the price of the 30-year bond. These differential effects on different segments of the yield curve could be the result of chance, or it could be that different announcements affect in different ways short- vs. long-term expectations.

. Sign and Size of Response Commentaries in the financial press explain the reaction of the bond market to economic news mainly in terms of revisions of inflationary expectations, where, in accord with a Phillips curve view, inflation is perceived to be positively correlated with economic activity. Our results are consistent with this interpretation. Procyclical variables, such as Nonfarm Payrolls, affect bond prices negatively, while counter-cyclical variables, such as Initial Jobless Claims, have a positive impact on prices.11

Economic News and Bond Trading

This section studies the effects of economic announcements on trading volume, bid-ask spreads, and price volatility. In this analysis, we focus on the threemonth bill and the 10-year note whose price behavior is representative of shortterm and intermediate- to long-term instruments, respectively. We concentrate on the announcements that significantly affect the price of the two instruments.14

Trading Volume Table 4 presents the ratio of the average trading volume over different intervals preceding and following announcement times to the average volume over the same interval on days when no announcement took place. Ratios are reported for the 10-year note and the three-month bill, together with t-statistics that the two average trading volumes on announcement and non-announcement days are equal.

Bid-Ask Spreads5 presents the ratio between the average bid-ask spread at different times before and after the announcement and the average bid-ask spread at the same times during non-announcement days for the 10-year note and for the threemonth bill. 18 The average spreads are 2.6 cents and 0.26 cents per $100 price, for the bill and the note, respectively.For most announcements, for both the 10-year note and the three-month bill, we find a significant widening of the spread exactly at the time when the announcement is made. The spread then reverts to its normal values after five to 15 minutes for the 10-year note. Spreads tend to remain wide somewhat longer for the three-month bill: in the case of the employment report, spreads are still twice their normal value 45 minutes after the announcement.

Prim Volatility: We measure price volatility around the announcements by the ratio of the mean absolute value of price changes on announcement days over the mean absolute value of price changes on non-announcement days, during the same time interval.19 The time intervals that we consider start 30 to five minutes before the announcements and end 45 to 60 minutes after the announcements. Volatility ratios are reported in Table 6.

ConclusionsThis paper examines the effect of economic announcements on the price, volume, bid-ask spread, and price volatility of Treasury securities. To analyze price effects, we use intraday data of bid and ask quotes from the inner market for U.S. government bonds. Our database provides a continuous posting of bids and asks, and the trading around announcement times is sufficiently intense that, in most cases, there are multiple trades every minute. This allows us to measure impact on price at very short intervals. Many announcements are made concurrently. By using a database on forecasts, we are able to measure the surprise component of an announcement. This allows us to separate out the impact of concurrent announcements and to measure the role of public information in explaining volatility.