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The Flight-to-Liquidity Premium in U.S. Treasury Bond Prices

  • Francis A. Longstaff

    (University of California, Los Angeles)

This article examines whether there is a flight-to-liquidity premium in Treasury bond prices by comparing them with prices of bonds issued by Refcorp, a U.S. government agency, which are guaranteed by the Treasury. It finds a large liquidity premium in Treasury bonds, which can be more than 15% of the value of some Treasury bonds. This liquidity premium is related to changes in consumer confidence, the amount of Treasury debt available to investors, and flows into equity and money market mutual funds. This suggests that the popularity of Treasury bonds directly affects their value.

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Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 77 (2004)
Issue (Month): 3 (July)
Pages: 511-526

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Handle: RePEc:ucp:jnlbus:v:77:y:2004:i:3:p:511-526
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  1. Liu, Jun & Longstaff, Francis A, 2000. "Losing Money on Arbitrages: Optimal Dynamic Portfolio Choice in Markets with Arbitrage Opportunities," University of California at Los Angeles, Anderson Graduate School of Management qt48k8f97f, Anderson Graduate School of Management, UCLA.
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