The effects of economic news and monetary policy on U.S. and German government bond yields
Honkaheimo, Mikko (2008)
2008
Kuvaus
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This study analyzes how scheduled U.S. macroeconomic news announcements and central bank monetary policy decisions affect daily government bond yields. To investigate the yield behaviour, this thesis focuses on observations of the U.S. and German government 2-, 5-, 10-, and 30-year benchmark bond indices during the period of January 2001 to December 2006. Furthermore, yield changes are analyzed during the whole sample period and during two different regimes of monetary policy, tightening and loosening of monetary policy, to see whether changes in yields are prone to the state of the economy.
The analysis focuses on 10 macroeconomic news announcements selected on the basis of previous literature and the Bureau of Labor Statistics classifications of major economic indicators. The news releases are Consumer Confidence, Consumer Price Index, Employment Report, Gross Domestic Product, Import Prices, Export Prices, Institute of Supply Management Survey, Producer Price Index and Retail Sales. In addition, Federal Reserve’s Open Market Committee’s and European Central Bank’s Governing Council’s meetings are included in the study.
The reaction of the daily absolute bond yields to macroeconomic news releases is estimated by using dummy variables in regression analysis. Furthermore, this thesis attempts to identify information that may account for the sharpest daily yield changes. To explain price changes, it is examined how closely these events correlate with the release times of macro announcements. Sharp price movements may be attributable to changes in expectations shared by investors related to the future monetary policy of the central bank. Therefore, the transparency of the central bank is measured as the ability of the market participants to anticipate the interest rate decisions.
The empirical findings suggest that U.S. macro releases have significant influence on bond yields in both countries. Moreover, the results convey that market reactions are different under distinct regimes of monetary policy. Furthermore, it is shown that monetary policy of the two central banks, the Fed and the ECB, has been generally well anticipated by the market participants.
The analysis focuses on 10 macroeconomic news announcements selected on the basis of previous literature and the Bureau of Labor Statistics classifications of major economic indicators. The news releases are Consumer Confidence, Consumer Price Index, Employment Report, Gross Domestic Product, Import Prices, Export Prices, Institute of Supply Management Survey, Producer Price Index and Retail Sales. In addition, Federal Reserve’s Open Market Committee’s and European Central Bank’s Governing Council’s meetings are included in the study.
The reaction of the daily absolute bond yields to macroeconomic news releases is estimated by using dummy variables in regression analysis. Furthermore, this thesis attempts to identify information that may account for the sharpest daily yield changes. To explain price changes, it is examined how closely these events correlate with the release times of macro announcements. Sharp price movements may be attributable to changes in expectations shared by investors related to the future monetary policy of the central bank. Therefore, the transparency of the central bank is measured as the ability of the market participants to anticipate the interest rate decisions.
The empirical findings suggest that U.S. macro releases have significant influence on bond yields in both countries. Moreover, the results convey that market reactions are different under distinct regimes of monetary policy. Furthermore, it is shown that monetary policy of the two central banks, the Fed and the ECB, has been generally well anticipated by the market participants.