The relationship of macroeconomy and the Treasury yield curve: evidence from China

The joint behavior of the Treasury yield curve and macroeconomic variables is important for bond pricing, investment decision and policy making. The empirical analysis has been carried out for mature markets like U.S., and in this paper we focus on China, an emerging market with an immature bond market. Through the Principle Component Analysis, we extract the level, slope and curvature factors from the Treasury yield curve and inflation factor and real economic activity factor from a set of macro variables. Structural VAR model is used to analyze their relationship. The impulse respond result shows that the inflation and real economic activity have significant influence on the level, slope and curvature factors of yield curve, and vice versa. The monetary policy can affect the three factors of yield curve, but cannot be influenced by any of them.