What do Bond Investors Learn from Macroeconomic News?

61 Pages Posted: 11 Nov 2019 Last revised: 21 Dec 2021

See all articles by Bruno Feunou

Bruno Feunou

Bank of Canada

Jean-Sebastien Fontaine

Bank of Canada

Guillaume Roussellet

McGill University - Desautels Faculty of Management

Date Written: October 31, 2019

Abstract

Macroeconomic data releases drive US bond yields primarily through the term premium instead of the expectation channel. The evidence exploits a monthly specification for yields embedding the impacts of news identified from high-frequency data. To match the facts, we develop and calibrate a no-arbitrage model where investors learn about future monetary policy using data releases with imperfect information. If macro news carry perfect information, the model predicts that the bonds’ Sharpe ratio decreases and the term premium declines by half for every maturity, suggesting that central bank’s communication can lower the term premium and financing costs across the economy.

Keywords: Term Structure, Macro-Finance, Variance Decomposition

JEL Classification: C32, E43, G12

Suggested Citation

Feunou, Bruno and Fontaine, Jean-Sebastien and Roussellet, Guillaume, What do Bond Investors Learn from Macroeconomic News? (October 31, 2019). Available at SSRN: https://ssrn.com/abstract=3478738 or http://dx.doi.org/10.2139/ssrn.3478738

Bruno Feunou

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada
613-782-8302 (Phone)

HOME PAGE: http://sites.google.com/view/bruno-feunou/home

Jean-Sebastien Fontaine (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

HOME PAGE: http://www.jean-sebastienfontaine.com

Guillaume Roussellet

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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