The Bank for International Settlements (BIS) published a working paper finding that much of the decline in long term government bond yields across 10 major advanced economies since the 1990s occurred around U.S. monetary policy announcements. The findings point to changes in expected future policy rates and to markets reassessing how the Federal Reserve responds to incoming economic news.
The analysis examines the day before, the day of and the day after Federal Open Market Committee (FOMC) announcements, windows covering about 7% of trading days. Yield declines were concentrated in FOMC windows preceded by U.S. consumer price index (CPI) or gross domestic product releases within four business days, with CPI releases playing the strongest individual role. A term structure model indicates that yield movements during FOMC windows primarily reflected revisions to expected future short term interest rates rather than changes in term premia. Japan showed a substantially weaker overall relationship between FOMC windows and declining yields.
The results support a “Fed response to news” interpretation, under which investors learn about the central bank’s policy reaction function by observing decisions following economic releases. Data release windows alone, announcements accompanied by dot plots and Fed Chair speech windows did not account for the secular decline. However, the yield decompositions do not establish causality. The findings remain consistent with alternative explanations, including markets learning about underlying structural economic forces, and further research is needed to distinguish between them.