SNB study reveals varied impact of monetary policy on bond fund flows
A new Swiss National Bank (SNB) working paper documents the global transmission of monetary policy surprises through bond fund flows. The study finds that responses vary across countries, investment strategies, and fund domiciles, highlighting cross-border spillovers.
Global ripples in bond markets
The working paper, utilizing daily monetary policy surprise measures and a multi-country panel of weekly fund flows, provides robust evidence that bond fund flows systematically react to such surprises.
This response, however, is far from uniform.
The study meticulously details how the direction, intensity, and persistence of these flow adjustments exhibit significant heterogeneity across various dimensions.
Specifically, the authors identify distinct patterns depending on the destination countries of the funds, the specific investment strategies employed by the bond funds (e.g., duration, credit focus), and the domicile of the funds themselves.
This granular analysis underscores that a one-size-fits-all view of monetary policy transmission through bond markets is insufficient, revealing a complex interplay of local market conditions, fund mandates, and investor behavior that shapes the ultimate impact of central bank actions.
The findings suggest that while the initial impulse from a monetary policy surprise is global, its propagation through the bond fund ecosystem is highly differentiated, leading to varied outcomes in capital allocation and market liquidity across jurisdictions and asset classes.
Beyond domestic borders
A key contribution of the SNB research is its exploration of cross-border spillovers, demonstrating that bond fund flows are not solely influenced by domestic monetary policy surprises but also respond significantly to foreign central bank actions.
This highlights the interconnectedness of global financial markets and the potential for international policy coordination or divergence to impact local market dynamics.
The paper delves into two primary mechanisms driving these observed responses.
Firstly, it investigates the relative importance of pure monetary policy shocks versus information shocks embedded within central bank communications, suggesting that market participants react to both the policy change itself and the new information it conveys about economic outlooks.
Secondly, the study examines the impact of exchange rate movements, triggered by monetary policy differentials, on portfolio rebalancing decisions by bond funds.
These mechanisms collectively illustrate how nonbank financial intermediaries, particularly bond funds, act as crucial conduits for the global transmission of monetary policy, amplifying or mitigating its effects across national borders and asset classes.
The findings have important implications for understanding financial contagion and the effectiveness of independent monetary policies in an open economy.
NBFIs: The new transmission belt
This research provides crucial empirical evidence on the often-underestimated role of nonbank financial intermediaries in global monetary policy transmission.
While the findings confirm existing theoretical concerns, the granular data on fund flows offers a robust foundation for future regulatory considerations.
The paper underscores the necessity for central banks to broaden their analytical scope beyond traditional banking channels when assessing policy effectiveness.