The Impact of Economic Policy Uncertainty on Government Bond Pricing

Abstract

This study examines the impact of economic policy uncertainty (EPU), encompassing fiscal policy uncertainty, monetary policy uncertainty, trade policy uncertainty, and inflation uncertainty, on government bond prices and bond market behaviour. Through empirical analysis, the study identifies significant positive relationships among the variables elucidating the intricate dynamics shaping bond pricing amidst policy uncertainty. Government bond prices are crucial in determining economic stability and financial system stability. Therefore, the topic was selected to analyse how policy uncertainty influences government bond prices. Here the study focuses on the U.S. bond market, particularly with 10-year yield.

The findings underscore the pivotal role of economic policy uncertainty in determining government bond prices. This impact is due to investor risk aversion, and market volatility. The impact of these factors has been varied over time with the changes in the economic state. This emphasises the need for the timely adoption of risk-adaptive strategies. Regression analyses demonstrated statistically significant relationships between policy uncertainty dimensions and bond market dynamics, emphasising the relevance of these factors in shaping financial market behaviour. Future studies could also examine the effectiveness of policy interventions and risk management strategies in mitigating the impact of uncertainty on bond prices. Additionally, expanding the scope to consider other financial instruments and factors influencing their behaviour would enhance future studies. While recognising limitations associated with reliance on historical data, quantitative methods, and government bond prices, future studies can overcome these limitations to further advance our understanding of the complex relationship between policy uncertainty and bond market dynamics.