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What Moves Treasury Yields?

Soroosh Soofi-Siavash () and Emanuel Moench ()
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Soroosh Soofi-Siavash: Bank of Lithuania, Vilnius University

No 88, Bank of Lithuania Working Paper Series from Bank of Lithuania

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.

Keywords: term structure of interest rates; yield curve; news shocks; uncertainty shocks; structural vector autoregressions; factor-augmented vector autoregressions (search for similar items in EconPapers)
JEL-codes: C55 E43 E44 G12 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2021-03-31
New Economics Papers: this item is included in nep-mac
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