Bond yield responses to macro news: the role of macro forecast disagreement and monetary policy uncertainty
Summary
Focus
We study how forecaster disagreement and interest rate uncertainty shape bond market reactions to economic data releases. Forecaster disagreement is about what a release will show before it comes out, while interest rate uncertainty is about the future path of rates set by the central bank. We examine intraday movements in US Treasury bond yields around six major economic announcements, including inflation, employment and GDP data, over the period from 1998 to 2024. To explain our findings, we build a model where investors gradually learn about the true state of the economy.
Contribution
Bond yields jump when economic data surprise markets. But the size of these jumps depends on the broader environment. We show that forecaster disagreement and interest rate uncertainty have distinct and opposing effects on how strongly bond markets react to economic news. We also explain why bond market reactions to inflation data and jobs data changed markedly after the Covid-19 pandemic.
Findings
We find two contrasting effects. Higher disagreement among forecasters dampens the reactions of bond yields. When forecasters disagree widely, markets treat a data release as a noisier guide to future interest rates, so yields move less. Higher interest rate uncertainty, by contrast, amplifies yield reactions. When the central bank's next move is harder to predict, each piece of economic news carries more weight for investors trying to forecast future policy rates.
One exception stands out: before the post-Covid inflation surge, bond yields barely reacted to inflation surprises even when interest rate uncertainty was high. This changed after the pandemic. As the Federal Reserve placed greater emphasis on fighting inflation, inflation data became more diagnostic about the future rate path, and the amplifying effect of interest rate uncertainty became clearly visible for the first time. At the same time, jobs data lost their previously strong ability to move yields conditional on rate uncertainty, partly because of data quality problems and partly because inflation became the key signal guiding monetary policy.
Abstract
Bond yields react to macroeconomic surprises, but the magnitude of this responsiveness depends on macroeconomic forecast disagreement and monetary policy uncertainty. Using intraday responses of US Treasury futures to surprises in macroeconomic data releases, we find that greater forecast disagreement about an economic indicator prior to its release dampens the yield curve response, while higher monetary policy uncertainty amplifies it. An exception is inflation surprises: prior to the post-COVID inflation surge, bond yield reactions to inflation surprises were not amplified by monetary policy uncertainty. We use a model with Bayesian learning to rationalize these findings. Specifically, large forecast disagreement indicates a weak link between the macroeconomic variable and future monetary policy, reducing the information value of macro news to forecast monetary policy. In contrast, during periods of high monetary policy uncertainty, macro news becomes more informative. Before the post-COVID inflation surge, investors may have perceived that the Federal Reserve placed little emphasis on its price stability mandate, which could have muted the yield curve response to inflation news even when policy rate uncertainty was high. The proposed model generates distinct, empirically testable effects of disagreement and monetary policy uncertainty on yield responses which, when extended to allow time-varying signal precision, accounts for the post-COVID shift in inflation sensitivity within a single unified framework.
JEL classification: E43, E44, G14
Keywords: macroeconomic news, forecast dispersion, policy uncertainty, bond yields, Bayesian learning
