How Does Monetary Policy Influence the U.S. Treasury Bond Yields, and What are the Implications for Portfolio Managers?

TL;DR

This study examines how monetary policy surprises affect U.S. Treasury bond yields across different maturities and discusses implications for portfolio managers, especially during crises and quantitative easing periods.

Contribution

It provides empirical analysis of monetary policy impacts on bond yields across maturities, challenging traditional views and offering practical insights for portfolio management.

Findings

Financial crises lower short-term yields

No clear factors affecting long-term yields

Implications for portfolio strategies during crises

Abstract

This paper investigates the impact of monetary policy surprises on U.S. Treasury bond yields and the implications for portfolio managers. Based on the supply and demand model, traditional economic theories suggest that Federal Reserve bond purchases should increase bond prices and decrease yields. However, New Keynesian models challenge this view, proposing that bond prices should not necessarily rise due to future expectations influencing investor behavior. By analyzing the effects of monetary policy surprises within narrow windows around Federal Open Market Committee (FOMC) announcements, this study aims to isolate the true impact of these surprises on bond yields. The research covers Treasury bonds of various maturities--3 months, 1 year, 10 years, and 30 years--and utilizes cross-sectional regression analysis. The findings reveal that financial crises significantly decrease short-term yields, while no obvious evidence of factors that might affect long-term yields. This paper provides insights into how monetary policy influences bond yields and offers practical implications for portfolio management, particularly during quantitative easing and financial crises.