Estimating Yield Impacts of Treasury Demand and Supply Changes

Daniel Beltran and Canlin Li

No 1447, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We develop a rich demand system framework to quantify the yield effects of shifts in U.S. Treasury supply and demand. Our model captures time-varying holdings shares and estimates sectoral demand elasticities using instrumental variables. We find that the Treasury market has become increasingly price-sensitive over time, driven by the declining participation of less price-sensitive foreign official investors and the rising role of more price-sensitive hedge funds and other private investors. A $100 billion increase in Treasury supply currently raises five-year yields by approximately 3 basis points. We validate the model by showing that the shifts in investor base explain a significant portion of historical yield changes. Our framework provides a flexible tool for policy analysis and counterfactual scenarios, including the yield effects of foreign official investor sales and Federal Reserve balance sheet policies.

Keywords: balance sheet policies; Treasury markets; asset pricing; demand elasticity; foreign official sales; term premium (search for similar items in EconPapers)
JEL-codes: E43 E52 G11 G12 (search for similar items in EconPapers)
Pages: 51 p.
Date: 2026-09-18
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:103792

DOI: 10.17016/IFDP.2026.1447

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