Central Bank Monetary Tones and Yields

By Musa Amadeus, Rajeev Bhargava, Timothy Graf, Michael Guidi, Michael Metcalfe, Gideon Ozik, and Ronnie Sadka

Published in the Journal of Fixed Income, Spring 2022

Read between the lines: Central bank monetary tones contain predictive information relating to weekly fluctuations in treasury yields.

This paper examines the ramifications of central bank monetary tones on future changes in yields. We observe that monetary tones in media coverage of central bank policies contain predictive information pertaining to future weekly fluctuations in yields. These relations are more pronounced between monetary policy meetings suggesting that investors may utilize monetary tones to ameliorate temporal discontinuities in information flow from central banks between monetary policy meetings. Bottom-to-top decile fluctuations in Federal Reserve monetary tones precipitate a roughly 5.58 basis point 1-week increase in Treasury 10-year yields. A strategy designed to capture these weekly fluctuations earns roughly 0.56% weekly or roughly 29% in annualized terms over the period spanning January 2015 through February 2021. We observe that these relations manifest across various prediction horizons and yield maturities and are robust to controlling for autocorrelation structures in yields and spreads. We also find that these relations are present within distinct geographic regions.