International Yield Spillovers

This paper investigates spillovers from foreign economies to the U.S. through changes in longterm Treasury yields. We document a decline in the contribution of U.S. domestic news to the variance of long-term Treasury yields and an increased importance of overnight yield changes—a rough proxy for the contribution of foreign shocks to U.S. yields—over the past decades. Using a model that identifies U.S., Euro area, and U.K. shocks that move global yields, we estimate that foreign (non-U.S.) shocks account for at least 20 percent of the daily variation in long-term U.S. yields in recent years. We argue that spillovers occur in large part through bond term premia by showing that a low level of foreign yields relative to U.S. yields predicts a decline in distant forward U.S. yields and higher returns on a strategy that is long on a long-term Treasury security and short on a long-term foreign bond.