Evaluating the Impact of Fed and Domestic Monetary Policies on Long-Term Government Bond Yields

This paper investigates the secular decline in real interest rates and the potential influence of central bank monetary policy on long-term government bond yields, focusing particularly on the US Federal Reserve (Fed). While various demand-side and supply-side explanations, such as ageing populations, lack of investment opportunities, and reduced productivity growth, have been proposed for this decline. A recent study highlighted the significant role of 3-day time windows around Federal Open Market Committee (FOMC) meetings in capturing yield changes in 10-year Treasuries. To explore if similar patterns exist in other advanced economies, this study constructs 3-day monetary policy decision windows around the 10-year government bond yields for selected countries, using both domestic central bank decision dates and those of the Fed. The findings suggest that, despite heterogeneity among advanced economies and factors like unconventional monetary policy tools and exchange rate interventions, there is substantial evidence supporting a stronger influence of the Fed's decisions on global bond yields compared to national monetary policies. By employing a simple Ordinary Least Squared (OLS) method to analyze the covariance between bond yields and policy decisions, this study establishes a connection between the literature on the global financial cycle and secular stagnation. The results imply that the Fed's influence extends beyond US borders, potentially contributing to a global monetary policy dynamic.