We investigate the behavior of shorts, considered sophisticated investors, before and after a set of Federal Reserve unconventional monetary policy announcements that spot bond markets did not fully anticipate. Short interest in agency securities systematically predicts bond price changes and other asset returns on the days of monetary announcements, particularly when growth or monetary news is released, indicating shorts correctly anticipated these surprises. Shorts also systematically rebalanced after announcements in the direction of the announcement surprise when the announcement released monetary or growth news, suggesting that shorts interpreted these announcements to imply further yield changes in the same direction.
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