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The high-frequency impact of news on long-term yields and forward rates: Is it real?

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  • Meredith J. Beechey
  • Jonathan H. Wright

Abstract

This paper uses high-frequency intradaily data to estimate the effects of macroeconomic news announcements on yields and forward rates on nominal and index-linked bonds, and on inflation compensation. To our knowledge, it is the first study in the macro announcements literature to use intradaily real yield data, which allow us to parse the effects of news announcements on real rates and inflation compensation far more precisely than we can using daily data. Long-term nominal yields and forward rates are very sensitive to macroeconomic news announcements. We find that inflation compensation is sensitive to announcements about price indices and monetary policy. However, for news announcements about real economic activity, such as nonfarm payrolls, the vast majority of the sensitivity is concentrated in real rates. Accordingly, we conclude that most of the sizeable impact of news about real economic activity on the nominal term structure of interest rates represents changes in expected future real short-term interest rates and/or real risk premia rather than changes in expected future inflation and/or inflation risk premia. This suggests that explanations for the puzzling sensitivity of long-term nominal rates need to look beyond just inflation expectations and toward models that encompass uncertainty about the long-run real rate of interest.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2008-39.

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Date of creation: 2008
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Handle: RePEc:fip:fedgfe:2008-39

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Keywords: Interest rates ; Stocks - Rate of return;

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References

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Citations

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Cited by:
  1. Bauer, Michael D., 2014. "Inflation expectations and the news," Working Paper Series 2014-9, Federal Reserve Bank of San Francisco.
  2. Patrick D'Arcy & Emily Poole, 2010. "Interpreting Market Responses to Economic Data," RBA Bulletin, Reserve Bank of Australia, pages 35-42, September.
  3. Carlo Rosa, 2013. "The high-frequency response of energy prices to monetary policy: understanding the empirical evidence," Staff Reports 598, Federal Reserve Bank of New York.
  4. Pitschner, Stefan, 2013. "Using Financial Markets To Estimate the Macro Effects of Monetary Policy:," Working Paper Series 267, Sveriges Riksbank (Central Bank of Sweden).
  5. Michelle L. Barnes & N. Aaron Pancost, 2010. "The sensitivity of long-term interest rates to economic news: comment," Working Papers 10-7, Federal Reserve Bank of Boston.
  6. John Y. Campbell & Robert J. Shiller & Luis M. Viceira, 2009. "Understanding Inflation-Indexed Bond Markets," NBER Working Papers 15014, National Bureau of Economic Research, Inc.
  7. Moretti, Laura, 2014. "Monetary policy, long real yields and the financial crisis," CFS Working Paper Series 457, Center for Financial Studies (CFS).
  8. Emi Nakamura & Jón Steinsson, 2013. "High Frequency Identification of Monetary Non-Neutrality," NBER Working Papers 19260, National Bureau of Economic Research, Inc.
  9. Michael J. Fleming & Neel Krishnan, 2009. "The microstructure of the TIPS market," Staff Reports 414, Federal Reserve Bank of New York.
  10. Hamilton, James D. & Wu, Jing Cynthia, 2014. "Testable implications of affine term structure models," Journal of Econometrics, Elsevier, vol. 178(P2), pages 231-242.
  11. Ciccarelli, Matteo & García, Juan Angel, 2009. "What drives euro area break-even inflation rates?," Working Paper Series 0996, European Central Bank.
  12. Liebermann, Joelle, 2011. "The Impact of Macroeconomic News on Bond Yields: (In)Stabilities over Time and Relative Importance," Research Technical Papers 7/RT/11, Central Bank of Ireland.
  13. Lars winkelmann & Markus Bibinger & Tobias Linzert, 2013. "ECB monetary policy surprises: identification through cojumps in interest rates," SFB 649 Discussion Papers SFB649DP2013-038, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  14. Tobias Adrian & Hao Wu, 2009. "The term structure of inflation expectations," Staff Reports 362, Federal Reserve Bank of New York.
  15. Mehmet Pasaogullari & Simeon Tsonevy, 2011. "The term structure of inflation compensation in the nominal yield curve," Working Paper 1133, Federal Reserve Bank of Cleveland.
  16. Carlo Rosa, 2012. "How "unconventional" are large-scale asset purchases? The impact of monetary policy on asset prices," Staff Reports 560, Federal Reserve Bank of New York.
  17. Till Strohsal & Lars Winkelmann, 2012. "Assessing the Anchoring of Inflation Expectations," SFB 649 Discussion Papers SFB649DP2012-022, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  18. Hamilton, James D. & Wu, Jing Cynthia, 2012. "Identification and estimation of Gaussian affine term structure models," Journal of Econometrics, Elsevier, vol. 168(2), pages 315-331.

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