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

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.

Macroannouncements, bond auctions and rating actions in the European government bond spreads

“…The last factor, that will deserve an entire research project, are policy announcements from central banks, considered for instance the great impact that Mario Draghi's whatever it takes had on government bonds. Finally, following [37] who look 590 at announcement effects in the real and nominal US Treasury market using real yields, nominal yields, and the spread between the two, we may also look at yields on the German Bund, yields on the other bonds, and the spreads between them. This is part of an ongoing research agenda.…”

Identification and estimation of Gaussian affine term structure models

“…Its appeal comes from its simple characterization of how risk gets priced by the market which, under the assumption of no arbitrage, generates predictions for the price of any asset. The approach has been used to measure the role of risk premia in interest rates (Duffee, 2002;Cochrane and Piazzesi, 2009), study how macroeconomic developments and monetary policy affect the term structure of interest rates (Ang and Piazzesi, 2003;Beechey and Wright, 2009;Bauer, 2011), characterize the monetary policy rule (Ang, Dong, and Piazzesi, 2007;Rudebusch and Wu, 2008;Bekaert, Cho, and Moreno, 2010), determine why long-term yields remained remarkably low in 2004 and 2005 (Kim and Wright, 2005;Rudebusch, Swanson, and Wu, 2006), infer market expectations of inflation from the spread between nominal and inflation-indexed Treasury yields (Christensen, Lopez, and Rudebusch, 2010), evaluate the effectiveness of the extraordinary central bank interventions during the financial crisis (Christensen, Lopez, and Rudebusch, 2009;Smith, 2010), and study the potential for monetary policy to affect interest rates when the short rate is at the zero lower bound Hamilton and Wu (forthcominga).…”

DOES INFLATION TARGETING ANCHOR LONG-RUN INFLATION EXPECTATIONS? EVIDENCE FROM THE U.S., UK, AND SWEDEN4

“…The signs of coefficients are mixed and there are very few significant coefficients. Beechey and Wright (2008) carry out a detailed study of the response of real rates. 25.…”