Can Treasury Markets Add and Subtract?

Roberto Gomez Cram, Howard Kung and Hanno Lustig

No 33604, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Treasury markets respond to the news in CBO cost estimates of individual bills about the future funding requirements from pending legislation. Treasury yields increase on days with major deficit-increasing bills, driven by an increase in expected inflation and nominal term premia, along with a decrease in convenience yields. The effects are three times larger for cost revisions for emergency spending proposals, which are unfunded and have a high probability of enactment. Our high-frequency estimates imply that a 1 percentage point one-time increase in deficits/GDP increases the 10-year nominal yield by 0.75 bps. This effect is equivalent to a 6.75 bps increase in yields for a persistent shock to deficits. Investors use these cost releases to learn about the U.S. fiscal stance. In a model with learning, we find that investors attributed a significant portion of the deficit news from cost releases to revisions in policy parameters and that 57% of the total deficit impact was expected to be unbacked.

JEL-codes: E44 E60 G12 (search for similar items in EconPapers)
Date: 2025-03
Note: AP EFG PE
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