US Macro News and Low-Frequency Changes in Small Open Economies Bond Yields

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 are important sources of lower-frequency quarterly fluctuations in bond yields in these small open economies, and even more important than their respective domestic macroeconomic news themselves. Furthermore, the macro-finance model shows that U.S. macroeconomic news are particularly important to explain low-frequency changes of the expectation components of the nominal, real and break-even inflation rates.

Keywords: Macroeconomic news, bond yields, small open economies

JEL Classification: E43, E44, E47, G14