The Effect of Financial Asset Supply on Prices: Evidence from the Discontinuation of 30-year US Treasury Bonds

Abstract

In this paper, I analyze how prices of Treasury securities reacted following the announcement by the US Treasury in October 2001 to discontinue 30-year Treasury Bonds. I find that prices of long-dated Treasury bonds react much more (the largest daily move ever) than shorter maturities, suggesting a supply effect. I also look at Treasury Inflation Protected Securities, and find that their prices also respond in a similar manner, which would be would not happen if the investors were updating inflationary expectations after the announcement. I also look at the swap spreads around the event, and find that the 30-year swap spreads increased by about 18 basis points, with the other maturities remaining virtually unchanged, providing validation for the supply effect. An examination of the reintroduction of 30-year Treasury bonds in February 2006 also provides evidence of a supply effect.