News Sentiment - A New Yield Curve Factor

We show that sentiment from newspaper articles can explain and predict movements in the term structure of US government bonds. This effect is stronger at the short end of the curve, coinciding with greater volatility and investors' need to continually reassess the Fed's reaction function. Facing such uncertainty, market participants rely on news and sentiment as a central element in their decision-making process. Considering this dependence, we propose a new yield curve factor - news sentiment - which is distinct from the three established yield curve factors (level, slope and curvature) as well as from fundamental macroeconomic variables