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

68 Pages Posted: 6 Feb 2022 Last revised: 13 Sep 2023

See all articles by Bruno Feunou

Bruno Feunou

Bank of Canada

Morvan Nongni Donfack

Laval University, Department of Economics

Rodrigo Sekkel

Government of Canada - Canadian Economic Analysis Department

Bingxin Ann Xing

ESSEC Business School

Date Written: December 17, 2021

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 the importance of U.S. macroeconomic news in explaining low-frequency changes in bond yields and break-even inflation rates, i.e., the difference between nominal and real yields, in these economies is largely attributed to its explanatory power for term and inflation risk premia.

Keywords: Macroeconomic news, bond yields, small open economies

JEL Classification: E43, E44, E47, G14

Suggested Citation

Feunou, Bruno and Nongni Donfack, Morvan and Sekkel, Rodrigo and Ann Xing, Bingxin, US Macro News and Low-Frequency Changes in Small Open Economies Bond Yields (December 17, 2021). Available at SSRN: https://ssrn.com/abstract=3988436 or http://dx.doi.org/10.2139/ssrn.3988436

Bruno Feunou (Contact Author)

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

Morvan Nongni Donfack

Laval University, Department of Economics ( email )

Canada

Rodrigo Sekkel

Government of Canada - Canadian Economic Analysis Department ( email )

Canada

Bingxin Ann Xing

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105
CERGY, 95021
France

HOME PAGE: http://bingxin-xing.com

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