What Volatility Reveals: Agnostic Identification of Exchange Rate and Treasury-Market Dynamics in Inconvenient Times

Lucas ter Steege and Sofia Velasco
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Lucas ter Steege: Deutsche Bundesbank
Sofia Velasco: Banco de España

No 2629, Working Papers from Banco de España

Abstract: This paper studies the financial-market transmission of the April 2025 U.S. tariff announcements, with a particular focus on the unusual combination of dollar depreciation and rising long-term U.S. Treasury yields. We ask whether the market reaction can be understood as the propagation of a single tariff-announcement shock or whether it instead reflects the interaction of distinct macro-financial disturbances. To address this question, we exploit time variation in the volatility and excess kurtosis of structural shocks to recover macro-financial forces without imposing event-based restrictions or exclusion assumptions. Our results show that the initial market reaction is consistent with a conventional safe-haven shock, but this mechanism cannot account for the subsequent joint behaviour of exchange rates and long-term U.S. Treasury yields. Instead, different segments of financial markets are dominated by distinct orthogonal shocks associated with safe-haven demand, confidence in U.S. institutions, Treasury-market intermediation and changes in the convenience value of dollar-denominated safe assets.

Keywords: exchange rates; Treasury yields; risk premia; trade policy shocks; safe-haven dynamics; heteroskedastic identification; financial spillovers (search for similar items in EconPapers)
JEL-codes: C32 E44 F31 F41 G14 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2026-09
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2629e

DOI: 10.53479/44413

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