When It Cannot Get Better or Worse: The Asymmetric Impact of Good and Bad News on Bond Returns in Expansions and Recessions

We examine empirically the response of bond returns and their volatility to good and bad macroeconomic news in economic expansions and recessions. We find that the information content of macroeconomic announcements is mostimportant when it contains bad news for bond returns in expansions and, to a lesser extent, when it contains good news for bond returns in contractions. In particular, we observe the strongest bond market response to bad news in the release of non-farm payrolls in expansions. During recessions, inflation news are relatively more important when they contain good news. We also document that macroeconomic news impacts substantially the volatility of bond returns at all maturities by increasing jump intensities and by alteringthe distribution of the jump size. While a large proportion of employment news results in a jump in expansions at all maturities, inflation news becomes more important in recessions and particularly at medium maturities.