Central Bank Communication and the Yield Curve

We extract novel measures of ECB target rate announcement and communications shocks using high frequency data on money market rates and study their impact on yields of Eurozone countries. We find that (i) target rate shocks have little effect on changes in bond yields of Eurozone countries, while communication shocks have a significant impact, with intermediate maturities being affected the most; (ii) positive (negative) communication shocks significantly lower (raise) the yield spread between the peripheral and core countries; (iii) this cross-sectional difference arises after the 2008 financial crises; (iv) higher credit risk amplifies the effect of communication shocks, and more so for core countries. We rationalize these findings in a parsimonious international term structure model in which interest rates are determined by the interaction between risk-averse arbitrageurs and reaching-for-yield investors.