A Study Of The Impact Of Economic Policy Uncertainty On Treasury Yields

The current world economic situation is changing dramatically,with China-US trade friction,Russia-Ukraine war and other external shocks,and thus the international situation is increasingly complicated.Combined with domestic economic development and reform,plus industrial transformation and upgrading,China is facing a higher level of economic policy uncertainty.Economic policy uncertainty has a significant impact on asset prices and is an important driving factor of financial market volatility.The Treasury bond market,as an important branch of the capital market,is the fundamental tool for pricing other financial assets.In this context,this paper aims to provide important references bases for policy makers,investors and market regulators,by studying the role and mechanism of economic policy uncertainty on Treasury bond yields,which help promote the healthy and stable development of Chinese bond market.This paper uses the monthly data of China’s interbank treasury bond yields to extract the level factor,slope factor and curvature factor in the yield curve through the principal component analysis method.A great number of Treasury bond yields with different maturities are fitted according to the Nelson-Siegel model in order to calculate the excess returns.The predictability of economic policy uncertainty on treasury bond yields with different maturities is first explored by regression analysis.Second,five representative macroeconomic indicators that reflect the monetary policy side,economic fundamentals and market capitalization are selected to construct a SVAR model together with the economic policy uncertainty factor to explore the mechanism of economic policy uncertainty on Treasury bond yields.The main findings of the study are as follows: first,based on the regression analysis,economic policy uncertainty has a significant predictive effect on Treasury yields,specifically,(1)Economic policy uncertainty has a positive predictive effect on short-and medium-term Treasury bond returns,and a negative predictive effect on long-term(10-year)Treasury bonds;(2)In terms of the absolute value of the impact,the impact on short-term Treasury bond returns is greater than that on medium-and long-term;(3)Economic policy uncertainty has an independent predictive effect on Treasury yields,reflecting information other than the term structure of interest rates,and has a greater impact in the case of bad economic conditions.Second,based on the SVAR model,it is found that unlike other macroeconomic factors that mainly act on the horizontal and slope factors,economic policy uncertainty affects Treasury yields mainly by acting on the curvature factor,and the effect on the curvature factor is alternately positive and negative with a longer duration.Finally,the findings of the study can be applied to,on the one hand,supplement the factors influencing the term structure of interest rates,provide a basis for better forecasting of Treasury yields,and help investors make better decisions;on the other hand,enrich the study of economic policy uncertainty on the Chinese bond market,and make policy recommendations for policy makers and market regulators,which is of great practical significance.