What can macro-active bond funds tell us about monetary policy change?

Abstract

This paper focuses on actively managed bond mutual funds, whose performance is most sensitive to monetary policy shocks. We document significant and persistent FOMC-day outperformance by macro-active bond funds, which is particularly pronounced during periods of heightened macroeconomic disagreement and attention. Consistent with their forecasting ability, these funds’ pre-FOMC portfolio duration adjustments can predict FOMC-day monetary policy shocks beyond the information offered by economic data and asset returns. Furthermore, we show that this macro-investing skill extends to GDP and CPI announcements and is consistently shared across various fund styles within fund families.