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What moves treasury yields?

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  • Moench, Emanuel
  • Soofi-Siavash, Soroosh

Abstract

We identify a yield news shock as an innovation that does not move Treasury yields contemporaneously but explains a maximum share of their future variation. Yields do not immediately respond to the news shock as the initial reaction of term premiums and expected short rates offset each other. While the impact on term premiums fades quickly, expected short rates and thus yields decline persistently. As a result, the shock explains a staggering 50% of Treasury yield variation several years out. A positive yield news shock is associated with a coincident sharp increase in stock and bond market volatility, a contemporaneous response of leading economic indicators, and is followed by a persistent decline of real activity and inflation which is accommodated by the Federal Reserve. Identified shocks to realized stock market volatility and business cycle news imply similar impulse responses and together capture the bulk of variation of the yield news shock.

Suggested Citation

  • Moench, Emanuel & Soofi-Siavash, Soroosh, 2022. "What moves treasury yields?," Journal of Financial Economics, Elsevier, vol. 146(3), pages 1016-1043.
    • Handle: RePEc:eee:jfinec:v:146:y:2022:i:3:p:1016-1043
    DOI: 10.1016/j.jfineco.2022.04.001
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    3. Sihvonen, Markus, 2021. "Yield curve momentum," Research Discussion Papers 15/2021, Bank of Finland.
    4. Marco Bernardini & Antonio M. Conti, 2023. "Announcement and implementation effects of central bank asset purchases," Temi di discussione (Economic working papers) 1435, Bank of Italy, Economic Research and International Relations Area.
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    More about this item

    Keywords

    Term structure of interest rates; Yield curve; News shocks; Volatility shocks; Business cycle news; Structural dynamic factor models;
    All these keywords.

    JEL classification:

    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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