The Fragility of Government Funding Advantage

US federal debt plays a special economic role giving the US government a funding advantage compared to the private sector. Is this an immutable feature of US treasuries arising from a treasury demand function or an equilibrium outcome influenced by government policies? New US historical yield curve estimates are consistent with the later—US financial market interventions coincide with simultaneous increases in US debt issuance and funding advantage when treasury risk remains low. We build a model where US funding advantage emerges from the financial sector's ability to use treasuries to hedge risk. Financial regulation can amplify the hedging properties of US treasuries by creating captive demand in bad times but only if the government runs stable fiscal policy to protect long-run treasury prices. Ultimately, the government cannot simultaneously choose: (i) high funding advantage, (ii) financial sector stability, and (iii) fiscal policy that destabilizes treasury prices. Balancing these tradeoffs has far-reaching welfare implications.