Can U.S. Treasury Markets Add and Subtract?

87 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 U.S. spending and tax proposals contain valuable news about future primary surpluses priced in by U.S. Treasury investors. Using daily event windows, we find that cost releases with large negative cash flow projections have lowered the valuation of all outstanding Treasurys by more than 20% between 1997 and 2022. The valuation effects are concentrated at longer maturities, with an overall increase of 4% in long-term nominal yields driven by an increase in nominal term premia and inflation expectations and a decrease in convenience yields. We account for these valuation effects in a model with Bayesian bond investors who use the cost releases to learn about the long-run dynamics of U.S. deficits. Using the estimated model, we infer that 57 cents of every dollar in the fiscal expansion is unbacked and passed through to Treasury valuations. Our estimates imply that a one percentage point surprise increase in the expected supply of Treasurys, expressed as a fraction of GDP, corresponds to an increase of the 10-year nominal yield by 31 bps and a drop in the convenience yield of 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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Stanford, CA California 94305-6072
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3108716532 (Phone)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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