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The Demand for Treasury Debt

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  • Arvind Krishnamurthy
  • Annette Vissing-Jorgensen
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    Abstract

    We show that the US Debt/GDP ratio is negatively correlated with the spread between corporate bond yields and Treasury bond yields. The result holds even when controlling for the default risk on corporate bonds. We argue that the corporate bond spread reflects a convenience yield that investors attribute to Treasury debt. Changes in the supply of Treasury debt trace out the demand for convenience by investors. We show that the aggregate demand curve for the convenience provided by Treasury debt is downward sloping and provide estimates of the elasticity of demand. We analyze disaggregated data from the Flow of Funds Accounts of the Federal Reserve and show that individual groups of Treasury holders also have downward sloping demand curves. Even groups with the most elastic demand curves have demand curves that are far from flat. The results have bearing for important questions in finance and macroeconomics. We discuss implications for the behavior of corporate bond spreads, interest rate swap spreads, the riskless interest rate, and the value of aggregate liquidity. We also discuss the implications of our results for the financing of the US deficit, Ricardian equivalence, and the effects of foreign central bank demand on Treasury yields.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12881.

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    Date of creation: Jan 2007
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    Handle: RePEc:nbr:nberwo:12881

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    Cited by:
    1. Michael J. Fleming & Joshua V. Rosenberg, 2007. "How do treasury dealers manage their positions?," Staff Reports 299, Federal Reserve Bank of New York.
    2. Dimitri Vayanos & Robin Greenwood, 2008. "Bond Supply and Excess Bond Returns," FMG Discussion Papers dp607, Financial Markets Group.
    3. Xavier Gabaix, 2008. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," NBER Working Papers 13724, National Bureau of Economic Research, Inc.
    4. Stefania D'Amico & Thomas B. King, 2012. "Flow and stock effects of large-scale asset purchases: evidence on the importance of local supply," Finance and Economics Discussion Series 2012-44, Board of Governors of the Federal Reserve System (U.S.).
    5. Monika Piazzesi & Martin Schneider, 2008. "Bond positions, expectations, and the yield curve," Working Paper 2008-02, Federal Reserve Bank of Atlanta.

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