The U.S. Public Debt Valuation Puzzle

Stijn Van Nieuwerburgh, Zhengyang Jiang, Hanno Lustig and Mindy Xiaolan

No 16082, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The market value of outstanding federal government debt in the U.S. exceeds the expected present discounted value of current and future primary surpluses by a multiple of U.S. GDP. When the pricing kernel fits U.S. equity and Treasury prices and the government surpluses are consistent with U.S. post-war data, a government debt valuation puzzle emerges. Since tax revenues are pro-cyclical while government spending is counter-cyclical, the tax revenue claim has a higher short-run discount rate and a lower value than the spending claim. Since revenue and spending are co-integrated with GDP, the long-run risk discount rates of both claims are much higher than the long Treasury yield. These forces imply a negative present value of U.S. government surpluses. Convenience yields for Treasurys are much larger than previously thought and/or U.S. Treasury markets have failed to enforce the no-bubble condition.

Keywords: Fiscal policy; Term structure; Debt maturity; Convenience yield (search for similar items in EconPapers)
JEL-codes: E32 E62 G12 H20 (search for similar items in EconPapers)
Date: 2021-04
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Working Paper: The U.S. Public Debt Valuation Puzzle (2019)
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