Systematic Movements in Macroeconomic Releases and the Term Structure of Interest Rates

In this paper, we study the fundamental relation between the numerous macroeconomic releases and the term structure of interest rates via a dynamic factor model. We use two dynamic factors to extract the systematic information from a wide array of noisy and sparsely observed macroeconomic releases, and then link the two factors to the daily term structure of interest rates using no-arbitrage arguments. The two dynamic factors can predict over 76 percent of the daily variation in LIBOR and swap rates across all maturities from one month to ten years. Inflation-related releases have large and positive impacts on interest rates of all maturities. Shocks on these releases lead to parallel shifts on the yield curve. In contrast, shocks on many employment and output related releases generate a slope effect on the term structure. Upward shocks on these variables tend to flatten an otherwise upward sloping yield curve. The estimated factor dynamics and market prices of factor risks provide further insight on the fundamental reasons behind the different term structure impacts from different macroeconomic releases.