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Fiscal Redistribution Risk in Treasury Markets

Author

Listed:
  • Roberto Gomez Cram
  • Howard Kung
  • Hanno Lustig
  • David Zeke

Abstract

Unfunded fiscal shocks are a significant source of risk premia in Treasury markets when central banks and governments decide to insulate taxpayers and expose bondholders' wealth to government funding needs. We illustrate this bond risk premium mechanism analytically in a two-agent model featuring monetary-fiscal interactions and a fraction of constrained agents. Surprise government transfer spending devalues real Treasury payoffs through fiscal inflation, while fiscal redistribution makes these high marginal utility states for bond investors, leading to risky government debt. We show that this fiscal redistribution mechanism can quantitatively explain the nominal term premium in a TANK framework.

Suggested Citation

  • Roberto Gomez Cram & Howard Kung & Hanno Lustig & David Zeke, 2025. "Fiscal Redistribution Risk in Treasury Markets," NBER Working Papers 33769, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33769
    Note: AP EFG
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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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