Macro forecast disagreement dampens bond yield responses
A new Bank for International Settlements (BIS) working paper finds that bond yield reactions to macroeconomic surprises are influenced by forecast disagreement and monetary policy uncertainty. Greater disagreement dampens the yield curve response, while higher policy uncertainty amplifies it.
Disagreement dampens, uncertainty amplifies
The study, using intraday responses of US Treasury futures to surprises in macroeconomic data releases, finds that greater forecast disagreement about an economic indicator prior to its release dampens the yield curve response.
Conversely, higher monetary policy uncertainty amplifies this reaction.
This pattern held for most economic indicators in the pre-2020 sample, with inflation surprises being an exception where reactions were not amplified by short-rate uncertainty.
Post-COVID, the CPI surprise response became positively conditional on short-rate uncertainty for the first time, while the nonfarm payrolls response, previously strongly conditional, weakened by roughly half.
The researchers analyzed six key macroeconomic variables, including CPI, nonfarm payrolls, initial jobless claims, durable goods orders, retail sales, and GDP.
Macroeconomic forecast disagreement was measured using the cross-sectional standard deviation of survey forecasts, while monetary policy uncertainty relied on a measure derived from derivatives prices.
Bayesian learning explains market shifts
The authors propose a Bayesian learning model to rationalize these findings.
In this framework, large forecast dispersion signals a weaker link between the macroeconomic variable and future monetary policy, thereby reducing the informational value of macro news for policy forecasting.
Conversely, during periods of high monetary policy uncertainty, macroeconomic announcements become more informative about the future path of interest rates.
The model is extended to incorporate time-varying precision of macroeconomic announcements, which accounts for the post-COVID shift in inflation sensitivity.
Specifically, CPI precision rose post-COVID as the Federal Reserve prioritized inflation, while nonfarm payrolls precision declined due to measurement noise and structural labor market dislocations.
Beyond rational inattention
This research provides a robust framework for understanding how market sensitivity to macro news is shaped by underlying informational states.
By separating forecast disagreement from policy uncertainty, the model offers a more nuanced explanation for observed shifts in bond yield responses.
These insights are highly relevant for central banks and investors navigating evolving data quality and policy communication.