Bond futures and order imbalance: Examining international linkages

• The link between trading activity and returns is examined using order imbalance methodology.
• Order imbalances are strongly related to returns, even after controlling for volume.
• Evidence of contrarian (continuation) investor behaviour following yield increases (falls).
• Strong influence of US market on returns and order-flow of other markets.

Order imbalance methodology is utilized to examine the link between trading activity and returns in the six most liquid international bond futures markets. Order imbalances are strongly related to contemporaneous returns, in the expected direction (i.e. excess buy (sell) orders push down (up) yields), even after controlling for aggregate market volume. There is evidence of contrarian investor behaviour following an increase in yields, but continuation of order imbalances when yields are falling (the prices of bond futures are rising). International bond futures markets are strongly intertwined with the US market having a strong influence on the returns and order-flow across all countries; this is likely an indication of the spill-over effect of US macroeconomic data.