RDP 9808: What Moves Yields in Australia? 6. Conclusion

The results presented in this study suggest that announcements of a wide range of economic information have systematically affected the volatility of bill yields and bond yields in Australia over the period reviewed, from January 1994 to September 1997. If anything, yields may have become more sensitive to the regular run of news over this period. Announcements about US economic news seem to have had a large effect on yields in Australia, especially on bond yields which – based on crude measures – have been more responsive to US news than domestic news.

The reaction in Australia of the fixed-interest market to economic announcements suggests that traders seem to distinguish between the information content of different economic statistics. Monetary policy announcements led to the largest absolute change in both short- and long-term yields, followed by the CPI. CPI and labour force announcements consistently affected yields over the period of the study. The effect of AWOTE on yield volatility has been far more prominent since mid 1996, whilst that of balance of payments and GDP news has diminished. The fixed-interest market also regarded announcements about building approvals, retail trade, imports and the financial aggregate as containing some information. Regular Reserve Bank commentary on the economy, and announcement of the Bank's dealing intentions the day after Board meetings, contained information for the market too, especially for bill yields.

Investors and traders systematically responded to the size and direction of unexpected information in economic announcements during this period, with monetary policy news (again) inducing the largest effect on short-term yields, as would be expected. Monetary policy surprises, however, did not have a systematic effect on bond yields, which tended to rally in immediate response to both tightenings and easings of monetary policy in the period examined. The CPI and employment news have had perennially significant effects on both bill and bond yields. The market reaction to surprises in AWOTE increased substantially from the beginning of the period to its end, while the effect of surprises in balance of payments news declined. On the whole, there is evidence to support the view that, as would be expected in an efficient market, traders react largely to the unanticipated component of new information.

The results suggest that the market perceives that announcements about inflation, employment and wages growth have had a larger weight in the Reserve Bank's decisions about monetary policy than other indicators of economic activity. Taken in sum, the results also suggest some order – i.e. some logic and consistency – in how the fixed-interest market in Australia responds to news.