Press Release

What Moves Sovereign Bond Markets? The Effects of Economic News on U.S. and German Yields

October 7, 2003
Note To Editors

The latest edition of the Federal Reserve Bank of New York’s Current Issues in Economics and Finance is available: What Moves Sovereign Bond Markets? The Effects of Economic News on U.S. and German Yields.

The study concludes that U.S. news releases on labor market conditions, real GDP growth, and consumer sentiment have large effects on interest rates in both the U.S. Treasury and German sovereign bond markets. In fact, U.S. economic news has a direct and large effect on German yields within an hour of its release.

Authors Linda Goldberg and Deborah Leonard examine how the news contained in economic announcements--the unanticipated information that can move markets--influences sovereign debt yields. Specifically, they consider the extent to which hourly changes in U.S. and German two- and ten-year note yields are driven by economic news and how this news spills over across markets. News can affect yields by offering market participants insight into economic fundamentals and shaping their expectations of central banks’ future monetary policy decisions. Yet because of variations in the timeliness, relevance, and reliability of news, announcements can have different effects across international markets and asset maturities.

Broadly, Goldberg and Leonard’s findings over the January 2000-June 2002 study period are consistent with the expectation that yields will rise on signs of stronger economic conditions or faster-than-anticipated inflation. They also suggest that the quantitative effects of economic news vary considerably along the yield curve and across markets.

In their analysis of U.S. Treasury yields, the authors find that a sizable number of U.S. announcements spurred changes in interest rates. These announcements generally had larger effects on the short end of the yield curve. Treasury yields rose following U.S. announcements of stronger-than-expected real GDP advance numbers, payrolls, and employment cost indexes. They also responded very positively to news of consumer sentiment surveys, producer surveys, and retail sales figures. Conversely, U.S. news of larger-than-expected unemployment rates and weekly unemployment claims caused Treasury yields to decline.

Most German economic news, according to the study, did not have a direct and large effect on U.S. Treasury yields. Exceptions included news on German retail sales and German manufacturing orders.

The authors also find that German bond yields were highly responsive to U.S. economic news. The U.S. announcements moving German yields were mostly the same ones driving U.S. Treasury yields. However, the responses of German yields typically were smaller. German yields declined with unexpectedly low values for U.S. news on consumer prices, durable goods orders, housing starts, and real GDP advance numbers, among others. Surprisingly large values for the U.S. unemployment report, the employment cost index, and initial unemployment claims were associated with significant German rate declines.

These strong effects confirm a very high degree of interdependence between the U.S. and European financial markets, explain Goldberg and Leonard.

Interestingly, some German data releases closely followed by market participants--such as German GDP, industrial production, and employment statistics--did not significantly influence German yields, report Goldberg and Leonard. Smaller-than-expected announcements of the German current account and trade balance were associated with rising yields at both ends of the yield curve. Higher-than-expected German output and lower-than-expected producer price inflation were associated with lower long-term yields.

The authors offer several possible explanations for the large influence of U.S. news releases. For example, with the United States perceived as a leading engine of global economic growth in recent years, U.S. economic fundamentals have become more important for business and investment activity worldwide. They also suggest that the influence of U.S. economic news is even larger in a globalized world economy in which business cycles across major industrialized countries have become more synchronized, leading to greater integration and news spillover across financial markets.

Linda Goldberg is a vice president and economist in the Bank’s Research and Market Analysis Group and Deborah Leonard is a senior trader analyst in the Markets Group.

Contact:
Linda Ricci
(212) 720-6143
linda.ricci@ny.frb.org