ABSTRACT

This paper investigates the importance of U.S. macroeconomic news in driving low-frequency fluctuations in the term structure of interest rates in Canada, Sweden, and the U.K. We follow two complementary approaches: First, we apply a regression-based framework that aggregates the impact of daily macroeconomic news on bond yields to a lower quarterly frequency. Next, we estimate a macro-finance affine term structure model linking the daily news to lower-frequency changes in bond yields and its expectations and term premia components. Both approaches show that U.S. macroeconomic news is an important source of lower-frequency quarterly fluctuations in bond yields in these open economies, and even more important than their respective domestic macroeconomic news. Furthermore, the macro-finance model shows that U.S. macroeconomic news is particularly important in explaining low-frequency changes in the expectation components of the nominal, real, and break-even inflation rates.

KEYWORDS

Macroeconomic news, Bond yields, Break-even inflation rates, Small open economies

JCR CLASSIFICATION

Q1

Journal of Banking and Finance

https://doi.org/10.1016/j.jbankfin.2024.107270