Working Paper: NBER ID: w26012
Authors: Simon Gilchrist; Vivian Yue; Egon Zakrajsek
Abstract: This paper uses high-frequency financial data to analyze the effects of US monetary policy—during the conventional and unconventional policy regimes—on international bonds markets. We focus on yields of dollar-denominated sovereign bonds issued by more than 90 countries since the early 1990s, which allows us to abstract from the policy-induced movements in exchange rates that otherwise confound the response of yields on foreign bonds denominated in local currencies. Our results show that yields on dollar-denominated sovereign debt are highly responsive to unanticipated changes in the stance of US monetary policy during both the conventional and unconventional policy regimes, and that the passthrough of unconventional policy actions to foreign bond yields is, on balance, comparable to that of conventional policy actions. In addition, a conventional US monetary easing leads to a significant narrowing of credit spreads on sovereign bonds issued by countries with a speculative-grade credit rating. During the unconventional policy regime, however, yields on speculative-grade sovereign debt move one-to-one with policy-induced fluctuations in yields on comparable US Treasuries. We also examine whether the response of sovereign credit spreads to US monetary policy differs between policy easings and policy tightenings and find no evidence of such asymmetry. This finding casts doubt on the notion that US monetary easings induce excessive risk-taking in international bond markets.
Keywords: Monetary Policy; International Bond Markets; Sovereign Bonds
JEL Codes: E4; E5; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Unanticipated easing in US monetary policy (E52) | Narrowing of credit spreads on sovereign bonds issued by countries with speculative-grade credit ratings (F34) |
| US monetary policy (E52) | Yields on dollar-denominated sovereign debt (F34) |
| Policy-induced fluctuations in yields on US Treasuries (E43) | Yields on speculative-grade sovereign debt (F34) |
| US monetary policy easings (E52) | Sovereign credit spreads (F34) |
| Conventional US monetary policy actions (E52) | Spillover effects on international bond markets (G15) |
| Unconventional US monetary policy actions (E52) | Spillover effects on international bond markets (G15) |