Expectations and risk premia at 8:30am: Macroeconomic announcements and the yield curve

BIS Working Papers No 527
November 2015

We investigate the movements of the yield curve after the release of major U.S. macroeconomic announcements through the lenses of an arbitrage-free dynamic term structure model with macroeconomic fundamentals. Combining estimated yield responses obtained using high-frequency data with model estimates using monthly data, we show that bond yields move after announcements mostly because of revisions to expectations about short-term interest rates. Changes in risk premia are also sizable, partly offset the effects of short-rate expectations and help to account for the hump-shaped pattern across maturities. Most announcement responses are due to changes in expectations about the output gap.

JEL classification: G0, G1, E0, E4

Keywords: Bond excess returns, term structure of interest rates, affine models, macroeconomic announcements