The response of sovereign bond yields to U.S. monetary policy

This paper compares the effects of U.S. conventional monetary policy on foreign government bond yields with those of the unconventional measures employed after the target federal funds rate hit the effective lower bound (ELB). For the ELB period, we identify two U.S. monetary policy surprises: (i) changes in the 2-year Treasury yield around policy announcements; and (ii) changes in the 10-year Treasury yield that are orthogonal to those in the 2-year yield. We find that the U.S. monetary policy has a pronounced effect on both the short- and long-term interest rates for advanced foreign economies: an expansionary U.S. monetary policy steepens the foreign yield curve during the conventional period and flattens the foreign yield curve during the unconventional period. In general, the average international spillover of U.S. unconventional policy is comparable to that of conventional policy; there are, however, significant differences in the degree of spillovers across advanced economies and emerging economies.