The Sensitivity of Corporate Bond Volatility to Macroeconomic Announcements

Abstract

The paper examines excess returns and volatility of Treasury bonds, and both corporate investment grade (CIG) bonds and high yield (HY) bonds of different maturities on days with scheduled macroeconomic announcements. We find that all bonds earn positive announcement-day excess returns which increase monotonically with maturity. Treasury and CIG bond excess returns exhibit strong GARCH effects with highly persistent shocks. Volatility is about 100% higher on announcement days for CIG’s and Treasuries, where the effect decreases with maturity. Unlike general shocks, announcement day shocks do not persist and only affect announcement-day conditional variance. HY bonds behave quite differently around macroeconomic announcements than CIG and Treasuries of corresponding maturity. Mainly, we find evidence that HY bond general shocks do not persist and do not affect conditional variance forecasts. We also find that different macroeconomic announcement types affect bond excess returns in dissimilar fashion.