DP15978 What Moves Treasury Yields?
We identify a yield news shock as an innovation that does not move Treasury yields contemporaneously
but explains a maximum share of their future variation. Yields do not immediately
respond to the news shock as the initial reaction of term premiums and expected short rates offset
each other. While the impact on term premiums fades quickly, expected short rates and thus
yields decline persistently. As a result, the shock explains a staggering 50 percent of Treasury
yield variation several years out. A positive yield news shock is associated with a coincident
sharp increase in stock and bond market volatility, a contemporaneous response of leading economic
indicators, and is followed by a persistent decline of real activity and inflation which is
accommodated by the Federal Reserve. Identified shocks to realized stock market volatility and
business cycle news imply similar impulse responses and together capture the bulk of variation
of the yield news shock.