Global bond yield decline concentrates around US rate decisions
Three-day windows around Federal Reserve decisions account for most of the decline in long-term yields since the 1990s, BIS researchers find across ten advanced economies. Changes mainly reflect lower expected future short-term rates rather than term premia.
Three days capture decades
Boris Hofmann, Zehao Li and Steve Pak Yeung Wu document the pattern in Bank for International Settlements (BIS) Working Paper 1393. They sum daily changes in 10-year government yields during three-day windows around Federal Open Market Committee (FOMC) announcements.
Their decomposition produces a pseudo R-squared of 94 percent for US yields but only 18 percent for Japan.
A term structure model attributes the US window decline mainly to expected short-term rates, with a fit of 98 percent.
Windows preceded by consumer price index or GDP releases capture US window movements with a fit of 99 percent.
CPI-preceded windows alone deliver 81 percent for US yields and 60 percent for other economies, despite representing only 28 percent of FOMC windows.
News matters through policy
The authors classify meetings by whether CPI or GDP data arrived within four business days.
They connect the yield declines to the Fed's response to previously available news.
Regressions using cumulative policy-surprise components achieve an average R-squared of 87 percent across economies and 92 percent in the US; the news-response component supplies most explanatory power.
Separate macro release windows, dot plot meetings and Chair speeches do not capture the secular decline.
US policy rates predict foreign rates in Granger tests, but not conversely.
Timing does not establish causality
The authors stress that window decompositions and Granger tests do not establish causality.
They leave open whether markets learn about structural forces, revise perceived policy responses or respond to policy-induced changes in equilibrium rates.
Distinguishing these mechanisms requires further research.