Bond Supply Expectations and the Term Structure of Interest Rates

Abstract

We are the first to explore the empirical relationship between interest rates and debt supply expectations derived from Treasury press releases. We find that news on expected government bond supply affects bond yields, but only when the news is an accurate reflection of future supply. We exploit the difference in news accuracy between German and Italian press releases to illustrate our findings. Estimates of a macro term-structure model confirm that accurate expected supply is a significant factor behind the timevariation of bonds’ risk premia. Our findings support term-structure models that account for imperfect asset substitutability and preferred-habitat investors.

Keywords: Expected Supply, Quantitative Easing, Term Structure, Interest Rates, Government Bonds

JEL Classification: G01, G12, E43, E41, E51, E52, E58