What moves treasury yields?

We identify a yield news shock as an innovation that does not move Treasury yields con-temporaneously but explains a maximum share of their future variation. Yields do not immediately respond to the news shock as the initial reaction of term premiums and ex-pected short rates offset each other. While the impact on term premiums fades quickly, expected short rates and thus yields decline persistently. As a result, the shock explains a staggering 50% of Treasury yield variation several years out. A positive yield news shock is associated with a coincident sharp increase in stock and bond market volatility, a contem-poraneous response of leading economic indicators, and is followed by a persistent decline of real activity and inflation which is accommodated by the Federal Reserve. Identified shocks to realized stock market volatility and business cycle news imply similar impulse responses and together capture the bulk of variation of the yield news shock.(c) 2022 Elsevier B.V. All rights reserved.