Abstract: We construct a novel dataset of sector-level U.S. Treasury holdings, covering the majority of the market. Using this dataset, we estimate maturity-specific demand functions and elasticities of different investors and the Fed, and integrate them into a dynamic equilibrium model of the Treasury market with risk-averse arbitrageurs. Quantifying the model reveals that (1) there is a steep downward-sloping term structure of Treasury market elasticity; (2) monetary tightening raises term premia due to arbitrageurs interacting with investors exhibiting high cross-elasticities; (3) QE has limited impact unless the Fed credibly commits to sustained balance sheet expansion.
Abstract: We measure the elasticity of demand for Treasuries at auction directly from bidding data. From 1992 to 2010, demand for Treasuries was surprisingly elastic: a 1% increase in the supply of Treasuries relative to the amount outstanding corresponded to a 2 basis point increase in long-term yields. Since 2010, demand has become almost five times more inelastic, implying that yields now rise by 9 basis points per 1% increase in supply. This deterioration of demand is also apparent in the secondary market. Prior to 2010, long-term yields declined on average by 1.5 basis points after auctions and these declines have been concentrated in auctions with strong investor demand. After 2010, this trend has reversed and yields no longer fall after auctions. This weaker demand for Treasuries coincides with less foreign investor demand and reduced secondary market liquidity.
Discussant: Valentin Haddad, University of California-Los Angeles
Abstract: We show that the debt ceiling significantly impacts the duration of government liabilities through an unintended interaction between Treasury issuance rules and the debt ceiling constraint. During debt ceiling episodes, the Treasury allows more bills to mature than it issues. In recent years, this force has induced fluctuations in bill supply greater than one percent of GDP. We exploit this to construct an instrument for bill supply and show that the debt ceiling distorts convenience premia and the pricing of investment-grade corporate credit. We attribute the Treasury’s implicit decision to lengthen the duration of its liabilities to an intermediation constraint.
Discussant: Matthias Fleckenstein, University of Delaware
