Abstract:

This paper documents that daily releases of cost projections about legislation contain valuable news about the path of primary surpluses. News of lower future surpluses extracted from individual bills decreases the nominal return to the government bond portfolio in a daily event window with a substantial return drift in the ensuing months. Government discount rate components respond persistently in the opposite direction: convenience yields decrease and nominal term premia increase in response to lower surpluses. We explain the bond return responses and subsequent drifts in a present value framework with Bayesian investors that use the cost releases to learn about the evolution of the federal budget process.