The Fragility of Government Funding Advantage

Jonathan Payne and Bálint Szőke

RBA Annual Conference Papers from Reserve Bank of Australia

Abstract: US federal debt plays a special economic role giving the US government a funding advantage compared to the private sector. Is this an immutable feature of US treasuries arising from a treasury demand function or an equilibrium outcome influenced by government policies? New US historical yield curve estimates are consistent with the later—US financial market interventions coincide with simultaneous increases in US debt issuance and funding advantage when treasury risk remains low. We build a model where US funding advantage emerges from the financial sector's ability to use treasuries to hedge risk. Financial regulation can amplify the hedging properties of US treasuries by creating captive demand in bad times but only if the government runs stable fiscal policy to protect long-run treasury prices. Ultimately, the government cannot simultaneously choose: (i) high funding advantage, (ii) financial sector stability, and (iii) fiscal policy that destabilizes treasury prices. Balancing these tradeoffs has far-reaching welfare implications.

Keywords: convenience yields; government debt; financial repression; safe assets (search for similar items in EconPapers)
Date: 2025-09, Revised 2025-11
New Economics Papers: this item is included in nep-fdg
Note: Paper presented at the RBA's annual conference 'Monetary and Fiscal Policy Interactions', Sydney, 4–5 Sept 2025.
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Persistent link: https://EconPapers.repec.org/RePEc:rba:rbaacp:acp2025-06

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