Expectations and risk premia at 8:30am: Macroeconomic announcements and the yield curve

We investigate the movements of the yield curve after the release of major U.S. macroeconomic announcements through the lenses of an arbitrage-free dynamic term structure model with macroeconomic fundamentals. Combining estimated yield responses obtained using high-frequency data with model estimates using monthly data, we show that bond yields move after announcements mostly because of revisions to expectations about short-term interest rates. Changes in risk premia are also sizable, partly offset the effects of short-rate expectations and help to account for the hump-shaped pattern across maturities. Most announcement responses are due to changes in expectations about the output gap.

JEL classification: G0, G1, E0, E4

Keywords: Bond excess returns, term structure of interest rates, affine models, macroeconomic announcements