Central Bank Monetary Tones and Yields

Abstract

This article examines the ramifications of central bank monetary tones on future changes in yields. The authors observe that monetary tones in media coverage of central bank policies contain predictive information pertaining to future weekly fluctuations in yields. Those relationships are more pronounced between monetary policy meetings suggesting that investors may use monetary tones to ameliorate temporal discontinuities in information flow from central banks between monetary policy meetings. Bottom-to-top decile fluctuations in Federal Reserve monetary tones precipitate a roughly 5.58 basis point 1-week increase in Treasury 10-year yields. A strategy designed to capture those weekly fluctuations earns roughly 0.56% weekly or roughly 29% in annualized terms during the period January 2015 through February 2021. The authors observe that those relationships manifest across various prediction horizons and yield maturities and are robust to controlling for autocorrelation structures in yields and spreads. They also find that those relationships are present within distinct geographic regions.