US Monetary Policy and International Bond Markets

Simon Gilchrist, Vivian Yue, Egon Zakrajšek

NBER Working Paper No. 26012
Issued in June 2019
NBER Program(s):International Finance and Macroeconomics, Monetary Economics

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.

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Document Object Identifier (DOI): 10.3386/w26012

Published: Simon Gilchrist & Vivian Yue & Egon Zakrajšek, 2019. "U.S. Monetary Policy and International Bond Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(S1), pages 127-161, December. citation courtesy of

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