Transmission Of Monetary Policy To Treasury Yield Curve

In the context of monetary policy transition from the quantitative type to the price type in China,this paper studies several issues on the transmission of monetary policy to Treasure yield curve,based on no-arbitrage term structure model.These issues are related to the diversity of China’s monetary policy toolkit,characteristics of the domestic bond market and the external impact faced by the bond market.The main findings are:In PBoC’s monetary policy toolkit,adjustments of deposit reserve rate and deposit/loan rate directly changes the intermediate policy target and have immediate and lasting effects on Treasury yields and its two components which have been confirmed by regres-sion and structure model analysis.However,regression analysis shows that CPI uncer-tainty can reduce the effects of deposit reserve rate adjustments on yields and risk premi-a.Open-market-operations,including both the liquidity operations and changes of repo rates,cannot produce immediate effects on yields.Structure model analysis also confirms that changing short-term interest rate produced a much weaker effect than announcing a change of deposit reserve rate or deposit/loan rate.According to the lower liquidity of ultra-long-term government bonds,we extend the AFNS model by introducing an additional factor that only spans the ultra-long-term yields.This model is comparable to the existing model that includes more factors in fitting the yield curve.Also,it is more economically meaningful in describing the liquidity of ultra-long-term bonds.Positive liquidity premia on ultra-long-term government bonds are fund.Using a linear transformation,we identify the short-term interest rate from the model as a proxy of monetary policy and find that existence of liquidity premia reduces the impacts of short-term interest rates on ultra-long-term yields.In a model that describes yield curves of exchange market and inter-bank market simultaneously,a spread factor can well characterize spreads between these two yield curves.This spread factor reflects the overall liquidity level of the bond market and has the ability in explaining the spreads between AAA-rated corporate bonds and government bonds.This result indicates that investors in exchange market are more vulnerable to liq-uidity shocks than commercial banks.And shock from the short-term interest rate increase the spreads between the two markets’ yield curves.The result of the event analysis shows that Treasury yield curves of China and US co-varied after the announcement of "8.11" exchange rate reform.Portfolio rebalance chan-nel took effect as risk premia in the US medium-and long-term Treasury yields decreased significantly after the announcement.Combined with the significant increase in the risk premia in China’s yield curve,decreases in US’s risk premia also reflect the "flight to safe-ty" effect.After studying other events of exchange rate reforms from 2005,we find that the event that impacts US yield curve will also affect exchange market.This finding is consistent with covered interest parity.The US quantitative easing policy announcements have robust and significant impacts on the expected yields of China’s Treasury yield curve within one day,which means that the Federal Reserve’s QE announcements change market’s expectation about PBoC’s mon-etary policy.The UK’s QE announcements also lead to a general decline in the expected yields of China within one day,but its impacts are lower than those of US.Besides,QE announcements of UK have significant and robust impacts on China’s risk premia.