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What Moves Treasury Yields?

Author

Listed:
  • Soroosh Soofi-Siavash

    (Bank of Lithuania, Vilnius University)

  • Emanuel Moench

    (Deutsche Bundesbank, Goethe University Frankfurt, CEPR)

Abstract
We characterize the joint dynamics of a large number of macroeconomic variables and Treasury yields in a dynamic factor model. We use this framework to identify a yield curve news shock as an innovation that does not move yields contemporaneously but explains a maximum share of the forecast error variance of yields over the next year. This shock explains more than half, and along with contemporaneous shocks to the level and slope of the yield curve, essentially all of the variation of Treasury yields several years out. The news shock is associated with a sharp and persistent increase in implied stock and bond market volatility, falling stock prices, an uptick in term premiums, and a prolonged decline of real activity and inflation. The accommodative response by the Federal Reserve leads to persistently lower expected and actual short rates. Treasury yields do not react contemporaneously to the yield curve news shock as the positive response of term premiums and the negative response of expected shot rates initially offset each other. Identified shocks to realized and implied financial market volatility imply essentially the same impulse responses and are highly correlated with the yield news shock, suggesting that they act as unspanned or hidden factors in the yield curve.

Suggested Citation

  • Soroosh Soofi-Siavash & Emanuel Moench, 2021. "What Moves Treasury Yields?," Bank of Lithuania Working Paper Series 88, Bank of Lithuania.
    • Handle: RePEc:lie:wpaper:88
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    4. Sihvonen, Markus, 2021. "Yield curve momentum," Research Discussion Papers 15/2021, Bank of Finland.
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    More about this item

    Keywords

    term structure of interest rates; yield curve; news shocks; uncertainty shocks; structural vector autoregressions; factor-augmented vector autoregressions;
    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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