Channels of US monetary policy spillovers to international bond markets

We show significant US monetary policy (MP) spillovers to international bond markets. Our methodology identifies US MP shocks as the change in short-term Treasury yields around Federal Open Market Committee meetings and traces their effects on international bond yields using panel regressions. We emphasize three main results. First, US MP spillovers to long-term yields have increased substantially after the 2007–2009 global financial crisis. Second, spillovers are large compared with the effects of other events, and at least as large as the effects of domestic MP after 2008. Third, spillovers work through different channels, concentrated in risk-neutral rates (expectations of future MP rates) for developed countries, but predominantly on term premia in emerging markets. In interpreting these findings, we provide evidence consistent with an exchange rate channel, according to which foreign central banks face a trade-off between narrowing MP rate differentials or experiencing currency movements against the US dollar. Developed countries adjust in a manner consistent with freely floating regimes, responding partially with risk-neutral rates and partially through currency adjustments. Instead, emerging countries display patterns consistent with foreign exchange interventions, which cushion the response of exchange rates but reinforce capital flows and their effects in bond yields through movements in term premia. Our results suggest that the endogenous effects of currency interventions on long-term yields should be added into the standard cost-benefit analysis of such policies.