Can U.S. Treasury Markets Add and Subtract? 

88 Pages Posted: 28 Jan 2024 Last revised: 5 May 2024

See all articles by Roberto Gomez Cram

Roberto Gomez Cram

New York University (NYU) - Leonard N. Stern School of Business

Howard Kung

London Business School; Centre for Economic Policy Research (CEPR)

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Date Written: September 12, 2023

Abstract

The CBO cost releases of legislative proposals contain valuable news about surpluses priced in by Treasury investors. Using daily event windows, we find that cost releases with large negative cash flows lowered Treasury valuations by more than 20% between 1997-2022, a sample marked by a significant shift in U.S. fiscal policy. The valuation effects are concentrated at longer maturities, with an overall increase of 4% in long-term nominal yields driven by an increase in term premia and inflation expectations and a decrease in convenience yields. In an estimated model where investors use the cost releases to learn about long-run deficits, we find that 57 cents of every dollar in the fiscal expansion is passed through to Treasury valuations, and a 1% surprise increase in the expected debt-to-GDP corresponds to an increase of the 10-year nominal yield by 31 bps and a drop in the convenience yield by 7.5 bps.

Keywords: fiscal policy, monetary policy, bond pricing, federal budget

JEL Classification: G12

Suggested Citation

Gomez Cram, Roberto and Kung, Howard and Lustig, Hanno N., Can U.S. Treasury Markets Add and Subtract?  (September 12, 2023). Stanford University Graduate School of Business Research Paper No. 4693279, Available at SSRN: https://ssrn.com/abstract=4693279 or http://dx.doi.org/10.2139/ssrn.4693279

Roberto Gomez Cram (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

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Howard Kung

London Business School ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Hanno N. Lustig

Stanford Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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