Granular Treasury Demand with Arbitrageurs
88 Pages Posted: 30 Sep 2024 Last revised: 31 Mar 2025
Date Written: September 29, 2024
Abstract
We construct a novel dataset of sector-level U.S. Treasury holdings, covering the majority of the market. Using this dataset, we estimate maturity-specific demand functions and elasticities of different investors and the Fed, and integrate them into a dynamic equilibrium model of the Treasury market with risk-averse arbitrageurs. Quantifying the model reveals that (1) strong arbitrage leads to an elastic Treasury market and a steeply downward-sloping term structure of market elasticity; (2) monetary tightening raises term premia due to arbitrageurs interacting with investors exhibiting high cross-elasticities; (3) QE has limited impact unless the Fed credibly commits to sustained balance sheet expansion.
Keywords: Treasury demand, financial intermediaries, arbitrage, monetary policy, quantitative easing
JEL Classification: E4, G1, G2
Suggested Citation: Suggested Citation