February 2018 (Revised October 2019)

US Monetary Policy and International Bond Markets

Simon Gilchrist, Vivian Yue, and Egon Zakrajsek


This paper analyzes how US monetary policy affects the pricing of dollar-denominated sovereign debt. We document that yields on dollar-denominated sovereign bonds are highly responsive to US monetary policy surprises—during both the conventional and unconventional policy regimes—and that the passthrough of unconventional policy to foreign bond yields is, on balance, comparable to that of conventional policy. In addition, a conventional US monetary easing (tightening) leads to a significant narrowing (widening) of credit spreads on sovereign bonds issued by countries with a speculative-grade credit rating but has no effect on the corresponding weighted average of bilateral exchange rates for a basket of currencies from the same set of risky countries; this indicates that an unanticipated tightening of US monetary policy widens credit spreads on risky sovereign debt directly through the financial channel, as opposed to indirectly through the exchange rate channel. During the unconventional policy regime, yields on both investment- and speculative-grade sovereign bonds move one-to-one with policy-induced fluctuations in yields on comparable US Treasuries. We also examine whether the response of sovereign credit spreads to US monetary policy differs between policy easings and tightenings and find no evidence of such asymmetry.

Accessible materials (.zip)

Original Paper: (PDF) | Accessible materials (.zip)

Keywords: Conventional and unconventional US monetary policy, financial spillovers, sovereign yields and credit spreads

DOI: https://doi.org/10.17016/FEDS.2018.014r1

PDF: Full Paper

Back to Top
Last Update: April 02, 2020