Granular Treasury Demand with Arbitrageurs

We show that understanding the Treasury market requires both estimating granular investor demand and structurally modeling arbitrageurs. Using a new dataset of sector-level U.S. Treasury holdings, we estimate demand functions that exhibit strong cross-maturity substitution. Embedding these estimates in an equilibrium model with risk-averse arbitrageurs yields two main findings. First, Treasury market elasticity is steeply downward sloping in maturity, with very high elasticity in the T-bill market; without structurally modeling arbitrageurs, a pure demand system implies implausibly low T-bill elasticity. Second, cross-maturity substitution implies that monetary tightening raises term premia; without it, as in baseline preferred habitat models, the prediction reverses.