What moves the Euro Area bond markets: Summary

In general, adjustments to prices are quick and new information is usually incorporated into prices within five minutes of announcements. The volatility adjustment is more long-lasting and excess volatility can be observe up to 30 minutes after the releases. Overall, German bond markets tend to react more strongly to the surprise component in US macro releases compared to the euro area and domestic releases, and the strength of these reactions to US releases has increased over the period considered.

Highlights

• Evidence is provided that the outcome of the German employment reports is known to investors ahead of the pre-scheduled release.
• Long-term bond yields can be seen as a weighted average of current and expected short -term interest rates over the maturity of the bond.
• Market participants may draw inferences about the euro area economy from US data releases. Only euro area releases that cause investors to revise their inferences should lead to market reactions.
• The announcements that seem to have a significant impact on long-term US bond yields are:
• Non-Farm Payroll
• Industrial Production
• New Home Sales
• Durable Goods Orders
• Producer Price Index
• Consumer Price Index
• Consumer Confidence Index
• ISM Manufacturing Index
• Housing Starts
• Initial Jobless Claims
• It is not clear if the strong observed price sensitivity for euro area bond yields from US macro announcements reflects real economy revisions and/or if it merely mirrors the strong financial integration between the two economies.
• The relation between target rate surprises and bond yields becomes negative when the slope of the curve is particularly steep.
• The surprise component is measured as [Surprise = (Actual - Expected)/Forecast Std. Error Deviation]
• Actual and forward looking measures of real economic activity and unemployment releases have a larger impact compared to price announcements.
• There is an immediate jump in the futures prices at the time of the announcement and little reaction thereafter.
• Policymakers can sometimes signal a preference for one or more macroeconomic indicators as input to their policy decisions for a given period.
• Key macroeconomic variables for countries which are growing in importance for the world economy may consequently over time retrieve increase attention.