International Yield Spillovers

59 Pages Posted: 14 Jun 2021 Last revised: 30 Jun 2021

See all articles by Don H. Kim

Don H. Kim

Board of Governors of the Federal Reserve System

Marcelo Ochoa

Board of Governors of the Federal Reserve System

Date Written: January, 2021

Abstract

This paper investigates spillovers from foreign economies to the U.S. through changes in longterm Treasury yields. We document a decline in the contribution of U.S. domestic news to the variance of long-term Treasury yields and an increased importance of overnight yield changes—a rough proxy for the contribution of foreign shocks to U.S. yields—over the past decades. Using a model that identifies U.S., Euro area, and U.K. shocks that move global yields, we estimate that foreign (non-U.S.) shocks account for at least 20 percent of the daily variation in long-term U.S. yields in recent years. We argue that spillovers occur in large part through bond term premia by showing that a low level of foreign yields relative to U.S. yields predicts a decline in distant forward U.S. yields and higher returns on a strategy that is long on a long-term Treasury security and short on a long-term foreign bond.

JEL Classification: E52, F37, G12, G15

Suggested Citation

Kim, Don H. and Ochoa, Marcelo, International Yield Spillovers (January, 2021). FEDS Working Paper No. 2021-1, Available at SSRN: https://ssrn.com/abstract=3865403 or http://dx.doi.org/10.17016/FEDS.2021.001

Don H. Kim (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Marcelo Ochoa

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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