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Treasury Supply Shocks and the Term Structure of Interest Rates in the UK

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  • Andras Lengyel

    (Magyar Nemzeti Bank (Central Bank of Hungary))

Abstract

How does the additional debt issued by the government affect the term structure of interest rates? In this paper we identify Treasury supply shocks using intraday high-frequency data, by exploiting the institutional setup of the UK government bond primary market. We find that supply shocks have positive effects on nominal and real interest rates. Most of the reaction is due to real term and inflation risk premia rather than the expectation component of yields. We argue both theoretically and empirically that supply shocks transmit via the repricing of duration and inflation risks in the economy. We also document that these effects are stronger under adverse economic and financial conditions.

Suggested Citation

  • Andras Lengyel, 2022. "Treasury Supply Shocks and the Term Structure of Interest Rates in the UK," MNB Working Papers 2022/6, Magyar Nemzeti Bank (Central Bank of Hungary).
    • Handle: RePEc:mnb:wpaper:2022/6
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    More about this item

    Keywords

    Term structure; government debt; bond risk premia; high-frequency identification;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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