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

25 Pages Posted: 19 Mar 2009

Date Written: March, 19 2009

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.

Suggested Citation

Dastidar, Siddhartha, The Effect of Financial Asset Supply on Prices: Evidence from the Discontinuation of 30-year US Treasury Bonds (March, 19 2009). Available at SSRN: https://ssrn.com/abstract=1365348 or http://dx.doi.org/10.2139/ssrn.1365348

Siddhartha Dastidar (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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