Corporate Bonds Trading Strategy
Investors have long studied the post-earnings announcement drift (PEAD) in the stock market, but new research reveals this phenomenon is also alive and well in the corporate bond market—and perhaps even more persistent. We show you a potential corporate bonds trading strategy.
A recent academic paper written by Yoshio Nozawa, Yangcheng Qiu, and Yan Xiong called Disagreement and Bond PEAD uncovers compelling evidence that corporate bonds react slowly and predictably to earnings news, creating opportunities and raising important questions about market efficiency.
Is this a potential post-earnings drift trading strategy in corporate bonds? As you’ll see, the results are good, and it might help you make a corporate bonds trading strategy. Corporate bonds are bonds issued by companies, not sovereign states or municipalities.
Related reading: –Bond trading strategies
Let’s dive in:
What Is PEAD, and Why Does It Matter in Bonds?
PEAD refers to the tendency of asset prices to continue drifting in the direction of an earnings surprise—positive or negative—well after the news is released.
While this is a well-documented pattern in stocks, the new study shows that bond prices also exhibit PEAD, meaning they adjust gradually rather than instantly to earnings information.
This is a surprising discovery. Corporate bonds are considered less volatile and more stable than equities. Yet, the research finds that bond prices of companies with positive earnings surprises tend to rise in the following months, while bonds of companies with negative surprises drift downward.
Post-Earnings Drift Trading Strategy In Corporate Bonds
Let’s formulate trading rules and settings and look at the performance and returns:
Let’s look at the two most interesting charts in the research paper:
The first figure presents the time series of cumulative PEAD portfolio returns. The PEAD portfolio is formed each month by long bonds with the highest earnings surprises (High CAR), and short bonds with the lowest earnings surprises (Low CAR). DEF is the return difference between long-term investment-grade bonds and long-term government bonds. TERM is the return difference between the long-term government bond return and the one-month T-bill rate. DEF and TERM are obtained from Amit
Goyal’s website.
The next figure plots the cumulative average abnormal returns (CAARs) on bonds with the highest earnings surprise (Q5) and those with the lowest earnings surprise (Q1) from one trading day before and 60 trading days after the earnings announcement dates.
Higher Trading Volume = Stronger PEAD? The Counterintuitive Finding
One of the paper’s most striking findings is that PEAD in bonds is more pronounced when trading volume is high. This may sound counterintuitive: Shouldn’t more trading mean faster information processing?
Not necessarily. The authors suggest disagreement among investors and noise trading—uninformed or speculative trades—can delay the market’s ability to incorporate earnings news fully. In this scenario, high volume doesn’t reflect clarity but rather confusion and divergent opinions, causing prices to drift longer before reaching equilibrium.
No PEAD in Stocks? The Asset Class Puzzle
Interestingly, the study also examines credit default swaps (CDS) and equities. It finds that PEAD is present in CDS but not in stocks, where the effect has weakened over time. This suggests that the efficiency of the equity market has improved, while bond and CDS markets remain slower to react.
The researchers attribute this to differences in investor behavior, transaction costs, and market structure between these asset classes.
A Unified Explanation: Investor Disagreement
To explain these patterns, the authors use a theoretical model based on investor disagreement. When investors strongly disagree about how to value a risky asset—like a bond—the process of reaching a consensus price takes longer. This slower information aggregation causes PEAD.
The model also explains why:
- PEAD is more persistent in bonds and CDS than in stocks
- Higher volume is linked to stronger PEAD
- Transaction costs and noise trading further contribute to delayed price adjustments
What This Means for Investors and Analysts
This research has important implications for bond investors, credit analysts, and multi-asset strategists. It suggests that:
- Earnings surprises affect bond prices gradually, creating potential trading opportunities
- Disagreement-driven inefficiencies can persist, even in mature and liquid markets
Final Thoughts
The discovery of post-earnings announcement drift in corporate bonds challenges assumptions about market efficiency and opens new avenues for both research and investment strategy.
Whether you’re managing a bond portfolio or analyzing cross-asset relationships, the interaction between earnings news, investor behavior, and price discovery remains a crucial piece of the puzzle.