Bond Lending and Bond Returns

Existing literature nds that proxies for short-sale constraints do not predict bond returns. Using more comprehensive data over a longer sample period and rating and maturity-matched benchmarks we nd that utilization, which proxies for short-sale constraints, predicts negative returns. Many lending fees are negative or low, suggesting many bond loans are fi nancing transactions. The bonds with both high lending fees and high utilization, for which lending is likely associated with short sales and constraints are likely to be binding, display large negative excess returns. These results are robust to controlling for bond characteristics and information from the equity lending market.