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Discussion Paper
Monetary Policy Surprises and Monetary Policy Uncertainty
In this note we find that after a given monetary policy surprise, primary dealers--key intermediaries in interest rate markets--tend to adjust their positions in the U.S. Treasury market and their exposures to interest rates more when the prevailing level of policy uncertainty is low than when it is high.
Discussion Paper
International Spillovers of Monetary Policy
This note presents a broad-brush overview of some of the salient issues on this topic and provides our sense of the answers to some key questions. We start by sketching out a simple framework for understanding how monetary policy actions spill over to other economies. The note then describes some back-of-the-envelope estimates of how U.S. monetary policy actions are transmitted overseas that we corroborate using a large-scale policy model (SIGMA). Finally, we discuss the implications of monetary policy spillovers for global economic stability, including the challenges posed by those ...
Working Paper
The Liquidity Effects of Official Bond Market Intervention
To "ensure depth and liquidity," the European Central Bank in 2010 and 2011 repeatedly intervened in sovereign debt markets through its Securities Markets Programme. These purchases provide a unique natural experiment for testing the effects of large-scale asset purchases on risk premia arising from liquidity concerns. To explore how official intervention influences liquidity premia, we develop a search-based asset-pricing model. Consistent with our model's predictions, we find statistically and economically significant stock and flow effects on sovereign bonds' liquidity premia in response ...
Working Paper
Monetary Policy Uncertainty and Monetary Policy Surprises
Monetary policy uncertainty affects the transmission of monetary policy shocks to longer-term nominal and real yields. For a given monetary policy shock, the reaction of yields is more pronounced when the level of monetary policy uncertainty is low. Primary dealers and other investors adjust their interest rate positions more when monetary policy uncertainty is low than when uncertainty is high. These portfolio adjustments likely explain the larger pass-through of a monetary policy shock to bond yields when uncertainty is low. These findings shed new light on the role that monetary policy ...
Working Paper
Are Long-Term Inflation Expectations Well Anchored in Brazil, Chile and Mexico?
In this paper, we consider whether long-term inflation expectations have become better anchored in Brazil, Chile, and Mexico. We do so using survey-based measures as well as financial market-based measures of long-term inflation expectations, where we construct the market-based measures from daily prices on nominal and inflation-linked bonds. This paper is the first to examine the evidence from Brazil and Mexico, making use of the fact that markets for longterm government debt have become better developed over the past decade. We find that inflation expectations have become much better ...
Working Paper
Term structure forecasting using macro factors and forecast combination
We examine the importance of incorporating macroeconomic information and, in particular, accounting for model uncertainty when forecasting the term structure of U.S. interest rates. We start off by analyzing and comparing the forecast performance of several individual term structure models. Our results confirm and extend results found in previous literature that adding macroeconomic information, through factors extracted from a large number of individual series, tends to improve interest rate forecasts. We then show, however, that the predictive power of individual models varies over time ...
Working Paper
Measuring Monetary Policy Spillovers between U.S. and German Bond Yields
In this paper we estimate the magnitude of spillovers between bond markets in the U.S. and Germany following monetary policy communications by the FOMC and the ECB. The identification of policy-related co-movements following FOMC announcements, in particular, can be difficult because many foreign bond markets, including those in Germany, are closed at the time of the announcement. To address this issue we use intraday futures market data to estimate spillovers during a narrow and overlapping event window. We find that about half of the reaction in German domestic yields spills over to U.S. ...
Discussion Paper
Unlocking the Treasury Market through TRACE
This joint FEDS Note and Liberty Street Economics blog post from staff at the Board of Governors and Federal Reserve Bank of New York aims to share initial insights on the Treasury cash transactions data reported to Financial Industry Regulatory Authority (FINRA)'s Trade Reporting and Compliance Engine (TRACE).
Working Paper
Cheap Talk and the Efficacy of the ECB’s Securities Market Programme: Did Bond Purchases Matter?
In 2010, in response to an ever-worsening fiscal crisis, the ECB began purchasing sovereign debt from troubled euro-area countries through its Securities Market Programme (SMP). This program was designed to improve market functioning and restore the monetary transmission mechanism within the euro area. This paper does not test those ideals. Rather, we test whether SMP purchases systematically lowered peripheral yields and spreads. We find limited evidence of purchase effects but large announcement effects. In addition, on days in which the ECB was believed to have made large purchases, yields ...
Discussion Paper
Breaking Down TRACE Volumes Further
Following an earlier joint FEDS Note and Liberty Street Economics blog post that examined aggregate trading volume in the Treasury cash market across venues, this post looks at volume across security type, seasoned-ness (time since issuance), and maturity. The analysis, which again relies on transactions recorded in the Financial Industry Regulatory Authority's (FINRA) Trade Reporting and Compliance Engine (TRACE), sheds light on perceptions that some Treasury securities—in particular those that are off-the-run—may not trade very actively. We confirm that most trading volume is made up of ...