Common Policy Communication and Sovereign Yield Curves (Research Square)

Summary

• Between 2014-2019 and 2020-2025, two-year yield commonality rose from 45.2% to 56.4%, while ten-minus-two-year slope commonality declined from 66.7% to 56.4%.p.2
• The communication analysis corpus covers 559 official central bank communications across six major sovereign bond markets.p.2
• Applying a joint common and local tone condition reduces average exposure from 50.5% to 8.3% in the six-market price-change exercise.p.2
• In a cash-flow return test over 63 holding periods, funded mean excess returns rise from -32.92 to -13.77 basis points when applying the tone condition.p.13

Key insights

1. Across six sovereign bond markets, two-year yield commonality increased by 11.27 percentage points after 2019 while ten-minus-two-year slope commonality fell by 10.31 points.p.2
2. A one-standard-deviation monthly increase in outside-Fed nominal Treasury supply corresponds to a 3.81 bp increase in ten-year fitted yields under ACM.p.8
3. Panel regressions across six countries show that a one-standard-deviation change in common policy communication is associated with a 16.43 bp shift in ten-year yields.p.9
4. One source-sample standard deviation of US Treasury-policy news generates 1.47 bp of Canadian and 1.87 bp of UK ten-year yield repricing.p.10
5. Incorporating a stable tone condition into bond entry rules reduces funded cash-flow excess return losses from -32.92 bp to -13.77 bp while decreasing exposure from 53.4% to 7.9%.p.13