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-matchedbenchmarks we nd that utilization, which proxies for short-sale constraints, predicts negativereturns. Many lending fees are negative or low, suggesting many bond loans are fi nancingtransactions. The bonds with both high lending fees and high utilization, for which lending islikely associated with short sales and constraints are likely to be binding, display large negativeexcess returns. These results are robust to controlling for bond characteristics and informationfrom the equity lending market