Marc W. Simpson

The influence of macroeconomic news on term and quality spreads

Abstract The role of macroeconomic news on interest rates and yield spreads are of great interest to market observers and policy makers alike. The study investigates the impact of U.S. macroeconomic surprises on the daily market yields of seven debt-market instruments. In addition, various measures of term and quality spreads are constructed in order to ascertain their response to economic surprises. Several important results are documented. First, of the 23 types of ‘news’ release announcements, 17 of them have a significant influence on interest rate changes. Second, changes in the Treasury yields and the corporate bond yield are positively impacted by surprises in the CPI and non-farm payroll figures. Third, movements in the prime interest rate, which is one of the base rates used by banks to price short-term business loans, is positively influenced by an unexpected increase in business activity. Fourth, the Fed funds rate is found to be an important driving variable in the interest rate system. Changes in the Fed funds rate significantly influences every other security in the system, with the exception of corporate bonds, but is itself largely insulated from the movement in yields of other securities. Finally, the study finds several sources of news that impact the term and quality spread measures. Interestingly, news that would encourage economic agents to revise their inflationary expectations upward have a positive influence on the term spread, but on the other hand, they are seen to narrow the quality spread. In general, the results are in accordance with the major theories of interest rate behavior and determination.

Selectively hedging the US dollar with foreign exchange futures contracts

Abstract This paper investigates the efficacy of five selective hedging strategies using foreign exchange futures contracts. The strategies are based on the relative purchasing power parity (PPP) and the random walk hypotheses. At 12- and 3-month investment horizons, a strategy which calls for shorting futures when there is a large deviation of the value of the foreign currency above its relative PPP equilibrium outperforms, on average, all other strategies in terms of return-per-unit-of-risk. Furthermore, this strategy produced an efficient frontier to the north-west of the frontiers of the other strategies, over the greatest range of standard deviations.

Macroeconomic News and Mortgage Rates

The study analyzes the influence of macroeconomic news announcements on (a) interest rates for commercial mortgages, residential mortgages, 10-year Treasury notes, and Baa-rated corporate bonds; and (b) corresponding mortgage spreads. It is both interesting and highly relevant from a policy and portfolio management standpoint to examine the implications of the influence of macroeconomic news announcements on mortgage markets. Some important results are reported. First, consistent with the notion of market integration, mortgage rates are found to be co-integrated with other capital market instruments. Second, of the 22 types of periodic macroeconomic news releases considered, 13 of them have a significant influence on at least one of the interest rates, and notably changes in hourly earnings and housing starts significantly influence all debt-security yields. More generally, macroeconomic news that conveys higher inflation and/or economic growth has a positive influence on mortgage and other interest rates. Finally, this study finds several announcements including durable goods orders, new home sales, personal consumption, non-farm payroll, trade balance and Treasury budget to have a significant influence on mortgage spreads.

The impact of inflationary news on money market yields and volatilities

This study investigates the impact of surprises in hourly wages, non-farm payroll, unemployment rate, and producer price index on the yields and volatilities of money market securities. The methodology is conducted in a framework that preserves the strong substitutability among the instruments. We find first the short-term interest rate nexus is inherently a steady state long-run phenomenon. Second, yield variability is fundamentally linked to the release of macroeconomic news that conveys important information on inflation. Third, results from the equality of variance tests suggest that volatilities on announcement days are significantly higher than non-announcement day volatilities across all securities.

The Informational Content of Consumer Expectations on the Direction of Exchange Rate Movements

This paper shows that the University of Michigan’s ”Survey of Consumers“ can be useful in predicting the direction of change in five U.S. dollar exchange rates. The explanatory power, however, is contingent on the particular survey question employed and the forecast horizon under consideration. The study finds that the survey question regarding car purchases does especially well in predicting the future direction of exchange rate movements. Furthermore, the results generally indicate that the survey is more useful when making distant (i.e., 12‐month ahead) currency forecast than for making near term (i.e., 3‐month and 6‐month ahead) predictions.