Yield Curve Reaction to Macroeconomic News in Europe : Disentangling the US Influence

This paper analyses the response of the euro yield curve to macroeconomic and monetary policy announcements. We present a new methodology for estimating the reaction of the euro swap curve to economic news in a data-rich environment. Given the sharp degree of interdependence between euro and US rates, we propose to use the factors of the US yield curve to disentangle the daily variations in euro rates stemming from US influence and the changes resulting from European news. We highlight the importance of taking the influence of the US yield curve into account. For some of the major announcements, results differ appreciably, depending on whether this influence is integrated. We then investigate the shape of the euro term structure reaction to a range of news types, measuring which are the most important economic releases for euro financial markets. In most instances, the curve’s reaction is hump shaped, with the most significant reactions concentrated in intermediate maturities. Finally, we provide a hierarchy of the economic figures that have the strongest impact on each maturity, and show the differences in important news for the short and long end of the curve.