U.S. Monetary Policy and International Bond Markets

Abstract

This paper analyzes how U.S. monetary policy affects the pricing of dollar‐denominated sovereign debt. We document that yields on dollar‐denominated sovereign bonds are highly responsive to U.S. monetary policy surprises—during both the conventional and unconventional policy regimes—and that the passthrough of unconventional policy to foreign bond yields is, on balance, comparable to that of conventional policy. In addition, a conventional U.S. monetary easing (tightening) leads to a significant narrowing (widening) of credit spreads on sovereign bonds issued by countries with a speculative‐grade credit rating but has no effect on the corresponding weighted average of bilateral exchange rates for a basket of currencies from the same set of risky countries; this indicates that an unanticipated tightening of U.S. monetary policy widens credit spreads on risky sovereign debt directly through the financial channel, as opposed to indirectly through the exchange rate channel. During the unconventional policy regime, yields on both investment‐ and speculative‐grade sovereign bonds move one‐to‐one with policy‐induced fluctuations in yields on comparable U.S. Treasuries. We also examine whether the response of sovereign credit spreads to US monetary policy differs between policy easings and tightenings and find no evidence of such asymmetry.

The credit channel of monetary policy before and after the zero lower bound: Evidence from the US equity market

“…For example,Gilchrist et al (2019) measure unconventional monetary policy by intraday changes in the 2-year Treasury yields Wright (2012), Rogers et al (2014), and Wu (2018. derive policy surprises at the ZLB from the principal component of the change in yields from 2-, 5-, 10-, and 30-year Treasury futures.13 The data are obtained from staff at the Federal Reserve Board.…”

International Spillovers of Monetary Policy: Conventional Policy vs. Quantitative Easing

“…However, this study does not control for the size of these announcements, as measured by their effects on domestic Treasury yields. Conversely, Rogers, Scotti, and Wright (2016a), Ferrari, Kearns, and Schrimpf (2017), Curcuru, De Pooter, and Eckerd (2018), and Gilchrist, Yue, and Zakrajsek (2018) measure of the size of the monetary policy action being announced by its impact on domestic sovereign yields, and then look at the sensitivity of foreign market variables to changes in those yields; for the most part, they find little difference in the response of the dollar and/or foreign yields to movements in domestic yields following QE-related and more conventional policy announcements. Bowman, Londono, and Sapriza (2015) likewise measure the responses of foreign sovereign yields to FOMC unconventional policy announcements; they find that these responses align well with the predictions of a model relating foreign to changes in U.S. yields, estimated over the period 2006-2013.…”

The Structure and Degree of Dependence in Government Bond Markets

“…Simultaneously, bond denomination in US dollars protects foreign investors from domestic currency devaluation and enables the preservation of their purchasing power (Eichengreen et al, 2003). Emerging markets issue government bonds denominated both in local currency or US dollars (see, Cayon et al, 2018;Gilchrist et al, 2019), and we include each of these bond denominations in our analysis.…”