Channels of US Monetary Policy Spillovers into International Bond Markets

We document significant US monetary policy spillovers to domestic bond markets in a sample of 24 countries, including 12 developed and 12 emerging market economies. We rely on an event study methodology where US monetary policy changes are identified as the response of short-term US treasury yields within a narrow window of Federal Reserve meetings, and trace its consequences on domestic bond yields using panel data regressions. We decompose yields for each country into a risk neutral and a term premium component, using the methodology developed by Adrian et al. (2013). We emphasize three main results. First, spillovers to long-term rates in our sample of countries has increased substantially after the global financial crisis: a 100 bp increase in US short-term rates during monetary policy meetings is associated with increases between 70-80 bp on international bond yields. Second, these effects work through markedly different channels on different country groups: while the effects in developed economies work mostly through risk neutral rates -associated with signaling effects in the course of future monetary policy-, spillovers to emerging countries are concentrated predominantly on the term premium channel -associated with portfolio rebalancing effects. Third, these spillovers are large compared to the effects of other events, and at least as large as the effects of domestic MP in long-term rates after 2008.