Hostname: page-component-78c5997874-8bhkd Total loading time: 0 Render date: 2024-11-05T16:01:18.477Z Has data issue: false hasContentIssue false

International Yield Spillovers

Published online by Cambridge University Press:  14 December 2022

Don H. Kim
Affiliation:
Federal Reserve Board Division of Monetary Affairs [email protected]
Marcelo Ochoa*
Affiliation:
Federal Reserve Board Division of Monetary Affairs
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

This article investigates spillovers from foreign economies to the U.S. through changes in long-term Treasury yields. We document a decline in the contribution of U.S. domestic news to the variance of long-term Treasury yields and an increased importance of overnight yield changes, a proxy for foreign shocks’ contribution to U.S. yields. A model that identifies U.S., Euro area, and U.K. shocks that move global yields suggests that foreign shocks account for at least 20% of the daily variation in long-term U.S. yields in recent years. We also document the predictability of long-term U.S. yields by the U.S.–foreign yield spread.

Type
Research Article
Creative Commons
This is a work of the US Government and is not subject to copyright protection within the United States. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington
Copyright
© Federal Reserve Board of Governors, 2022

Footnotes

We thank an anonymous referee and Hendrik Bessembinder (the editor) for helpful comments and suggestions. We are grateful for helpful comments from Luis Ceballos, Michiel De Pooter, Eric Engstrom, John Rogers, Min Wei, Jonathan Wright, and Emre Yoldas as well as seminar participants at the Federal Reserve Board, and the Eastern Finance Association 2021 Annual Meeting. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors.

References

Aizenman, J.; Chinn, M. D.; and Ito, H.. “Monetary Policy Spillovers and the Trilemma in the New Normal: Periphery Country Sensitivity to Core Country Conditions.” Journal of International Money and Finance, 68 (2016), 298330.CrossRefGoogle Scholar
Andersen, T. G.; Bollerslev, T.; Diebold, F. X.; and Vega, C.. “Real-Time Price Discovery in Global Stock, Bond and Foreign Exchange Markets.” Journal of International Economics, 73 (2007), 251277.CrossRefGoogle Scholar
Balduzzi, P.; Elton, E. J.; and Green, T. C.. “Economic News and Bond Prices: Evidence from the US Treasury Market.” Journal of Financial and Quantitative Analysis, 36 (2001), 523543.CrossRefGoogle Scholar
Bauer, M. D., and Hamilton, J. D.. “Robust Bond Risk Premia.” Review of Financial Studies, 31 (2018), 399448.CrossRefGoogle Scholar
Berardi, A.; Markovich, M.; Plazzi, A.; and Tamoni, A.. “Mind the (Convergence) Gap: Bond Predictability Strikes Back!Management Science, 67 (2021), 78887911.CrossRefGoogle Scholar
Bernanke, B. S.Federal Reserve Policy in an International Context.” IMF Economic Review, 65 (2017), 132.CrossRefGoogle Scholar
Bowman, D.; Londono, J. M.; and Sapriza, H.. “U.S. Unconventional Monetary Policy and Transmission to Emerging Market Economies.” Journal of International Money and Finance, 55 (2015), 2759.CrossRefGoogle Scholar
Brusa, F.; Savor, P.; and Wilson, M.. “One central bank to rule them all.” Review of Finance, 24 (2020), 263304.Google Scholar
Chinn, M. D., and Frankel, J. A.. “Who Drives Real Interest Rates Around the Pacific Rim: The USA or Japan?Journal of International Money and Finance, 14 (1995), 801821.CrossRefGoogle Scholar
Cieslak, A., and Pang, H.. “Common Shocks in Stocks and Bonds.” Journal of Financial Economics, 142 (2021), 880904.CrossRefGoogle Scholar
Cieslak, A., and Povala, P.. “Expected Returns in Treasury Bonds.” Review of Financial Studies, 28 (2015), 28592901.CrossRefGoogle Scholar
Cochrane, J. H., and Piazzesi, M.. “Bond Risk Premia.” American Economic Review, 95 (2005), 138160.CrossRefGoogle Scholar
Curcuru, S. E.; De Pooter, M.; and Eckerd, G.. “Measuring Monetary Policy Spillovers Between U.S. and German Bond Yields.” FRB International Finance Discussion Paper 1226 (2018a).CrossRefGoogle Scholar
Curcuru, S. E.; Kamin, S. B.; Li, C.; and Rodriguez, M.. “International Spillovers of Monetary Policy: Conventional Policy vs. Quantitative Easing.” FRB International Finance Discussion Paper 1234 (2018b).Google Scholar
D’Amico, S.; King, T. B.; and Wei, M.. “Macroeconomic Sources of Recent Interest Rate Fluctuations.” FEDS Notes, Board of Governors of the Federal Reserve System, Washington (2016).CrossRefGoogle Scholar
Dedola, L.; Rivolta, G.; and Stracca, L.. “If the Fed Sneezes, Who Catches a Cold?Journal of International Economics, 108 (2017), S23S41.CrossRefGoogle Scholar
Engstrom, E. C., and Sharpe, S. A.. “The Near-Term Forward Yield Spread as a Leading Indicator: A Less Distorted Mirror.” Financial Analysts Journal, 75 (2019), 3749.CrossRefGoogle Scholar
Evans, M. D., and Lyons, R. K.. “How is Macro News Transmitted to Exchange Rates?Journal of Financial Economics, 88 (2008), 2650.CrossRefGoogle Scholar
Fama, E. F., and Bliss, R. R.. “The Information in Long-Maturity Forward Rates.” American Economic Review, 77 (1987), 680692.Google Scholar
Faust, J.; Rogers, J. H.; Wang, S. Y.; and Wright, J. H.. “The High-Frequency Response of Exchange Rates and Interest Rates to Macroeconomic Announcements.” Journal of Monetary Economics, 54 (2007), 10511068.CrossRefGoogle Scholar
Faust, J., and Wright, J. H.. “Risk Premia in the 8:30 Economy.” Quarterly Journal of Finance, 8 (2018), 119.CrossRefGoogle Scholar
Fleming, M. J.The Round-the-Clock Market for U.S. Treasury Securities.” Federal Reserve Bank of New York Economic Policy Review 3 (1997).Google Scholar
Fleming, M. J., and Remolona, E. M.. “Price Formation and Liquidity in the US Treasury Market: The Response to Public Information.” Journal of Finance, 54 (1999), 19011915.CrossRefGoogle Scholar
Gerko, E., and Rey, H.. “Monetary Policy in the Capitals of Capital.” Journal of the European Economic Association, 15 (2017), 721745.CrossRefGoogle Scholar
Goldberg, L. S., and Leonard, D.. “What Moves Sovereign Bond Markets? The Effects of Economic News on US and German Yields.” Current Issues in Economics and Finance, 9 (2003), 17.Google Scholar
Gürkaynak, R. S.; Sack, B.; and Wright, J. H.. “The US Treasury Yield Curve: 1961 to the Present.” Journal of Monetary Economics, 54 (2007), 22912304.CrossRefGoogle Scholar
Hanson, S. G.Mortgage Convexity.” Journal of Financial Economics, 113 (2014), 270299.CrossRefGoogle Scholar
Hanson, S. G., and Stein, J. C.. “Monetary Policy and Long-Term Real Rates.” Journal of Financial Economics, 115 (2015), 429448.CrossRefGoogle Scholar
Kearns, J.; Schrimpf, A.; and Xia, F. D.. “Explaining Monetary Spillovers: The Matrix Reloaded.” CEPR Discussion Paper DP15006 (2020).Google Scholar
Kim, S.International Transmission of US Monetary Policy Shocks: Evidence from VARs.” Journal of Monetary Economics, 48 (2001), 339372.CrossRefGoogle Scholar
Kim, D. H., and Wright, J. H.. “An Arbitrage-Free Three-Factor Term Structure Model and the Recent Behavior of Long-Term Yields and Distant-Horizon Forward Rates.” FEDS Working Paper 2005-33 (2005).CrossRefGoogle Scholar
Kirchgässner, G., and Wolters, J.. “Does the DM Dominate the Euro Market? An Empirical Investigation.” Review of Economics and Statistics, 75 (1993), 773778.CrossRefGoogle Scholar
Krishnamurthy, A.The Bond/Old-Bond Spread.” Journal of Financial Economics, 66 (2002), 463506.CrossRefGoogle Scholar
Krishnamurthy, A., and Vissing-Jorgensen, A.. “The Aggregate Demand for Treasury Debt.” Journal of Political Economy, 120 (2012), 233267.CrossRefGoogle Scholar
Litterman, R., and Scheinkman, J.. “Common Factors Affecting Bond Returns.” Journal of Fixed Income, 1 (1991), 5461.CrossRefGoogle Scholar
Malkhozov, A.; Mueller, P.; Vedolin, A.; and Venter, G.. “Mortgage Risk and the Yield Curve.” Review of Financial Studies, 29 (2016), 12201253.CrossRefGoogle Scholar
Neely, C. J.Unconventional Monetary Policy Had Large International Effects.” Journal of Banking and Finance, 52 (2015), 101111.CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703708.CrossRefGoogle Scholar
Pasquariello, P., and Vega, C.. “Informed and Strategic Order Flow in the Bond Markets.” Review of Financial Studies, 20 (2007), 19752019.CrossRefGoogle Scholar
Rigobon, R.Identification Through Heteroskedasticity.” Review of Economics and Statistics, 85 (2003), 777792.CrossRefGoogle Scholar
Rigobon, R., and Sack, B.. “The Impact of Monetary Policy on Asset Prices.” Journal of Monetary Economics, 51 (2004), 15531575.CrossRefGoogle Scholar
Rogers, J. H.; Scotti, C.; and Wright, J. H.. “Evaluating Asset-Market Effects of Unconventional Monetary Policy: A Multi-Country Review.” Economic Policy, 29 (2014), 749799.CrossRefGoogle Scholar
Rogers, J. H.; Scotti, C.; and Wright, J. H.. “Unconventional Monetary Policy and International Risk Premia.” Journal of Money, Credit and Banking, 50 (2018), 18271850.CrossRefGoogle Scholar
Sentana, E., and Fiorentini, G.. “Identification, Estimation and Testing of Conditionally Heteroskedastic Factor Models.” Journal of Econometrics, 102 (2001), 143164.CrossRefGoogle Scholar
Stedman, K. D.Unconventional Monetary Policy and International Interest Rate Spillovers.” Federal Reserve Bank of Kansas City Economic Review, 105 (2020), 518.Google Scholar
Swanson, E. T.The Federal Reserve is Not Very Constrained by the Lower Bound on Nominal Interest Rates.” Brookings Papers on Economic Activity, 2 (2018), 555572.CrossRefGoogle Scholar
Swanson, E. T., and Williams, J. C.. “Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates.” American Economic Review, 104 (2014), 31543185.CrossRefGoogle Scholar
Wright, J. H.What Does Monetary Policy Do to Long-Term Interest Rates at the Zero Lower Bound?Economic Journal, 122 (2012), F447F466.CrossRefGoogle Scholar
Supplementary material: PDF

Kim and Ochoa supplementary material

Kim and Ochoa supplementary material

Download Kim and Ochoa supplementary material(PDF)
PDF 475.4 KB