Fiscal Redistribution Risk in Treasury Markets

Roberto Gomez Cram, Howard Kung, Hanno Lustig and David Zeke

No 33769, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Unfunded fiscal shocks are a significant source of risk premia in Treasury markets when central banks and governments decide to insulate taxpayers and expose bondholders' wealth to government funding needs. We illustrate this bond risk premium mechanism analytically in a two-agent model featuring monetary-fiscal interactions and a fraction of constrained agents. Surprise government transfer spending devalues real Treasury payoffs through fiscal inflation, while fiscal redistribution makes these high marginal utility states for bond investors, leading to risky government debt. We show that this fiscal redistribution mechanism can quantitatively explain the nominal term premium in a TANK framework.

JEL-codes: E62 G12 (search for similar items in EconPapers)
Date: 2025-05
New Economics Papers: this item is included in nep-dge, nep-fmk, nep-ifn and nep-upt
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