U.S Monetary Policy and Foreign Bond Yields

This paper compares the effects of conventional U.S. monetary policy on foreign government bonds yields with those of the unconventional measures employed after the target federal funds rate hit the zero lower bound in late 2008. We measure the U.S. monetary policy surprises using narrow-window changes in the 2-year Treasury yield bracketing FOMC announcements. The results indicate that an expansionary U.S. monetary policy steepens the foreign yield curve— denominated in local currency—during conventional period and flattens the foreign yield curve during unconventional period. The passthrough of unconventional U.S. monetary policy is, on balance, roughly comparable to that of conventional policy. We also find that a conventional U.S. monetary policy easing leads to a significant narrowing of credit spreads on dollar-denominated sovereign bonds issued by countries with a speculative-grade sovereign credit rating. However, during the unconventional policy regime, yields on speculative-grade sovereign debt denominated in dollars move one-to-one with yields on comparable Treasury securities. JEL Classification: E4, E5, F3