The Impact of Monetary Policy and Lender-of-Last-Resort Announcements on the Treasury Market

This paper presents new empirical evidence on the behavior of the U.S Treasury market in response to Federal Open Market Committee (FOMC) announcements during the Global Financial Crisis and the Covid-19 pandemic. We differentiate between announcements related to policy rate changes and those related to lender-of-last-resort liquidity facilities to examine their distinct impacts on the market. High-frequency data on interest rate futures are used to extract the surprise component of FOMC announcements. To also make use of announcements taking place outside the future exchanges trading hours, we show that high-frequency changes in exchange rates can be used to impute commonly used monetary policy surprises. Our findings reveal that policy rate and liquidity announcements decrease Treasury yields substantially but differ in their transmission mechanism. While announcements related to interest rates primarily affect bond yields through expected lower short rates, lender-of-last-resort announcements decrease bond yields by reducing term premia, demonstrating the complementary role of these different policies in stabilizing the Treasury market by influencing intermediaries and interest rates.