Treasury Supply Shocks and the Term Structure of Interest Rates in the UK

Andras Lengyel

No 2022/6, MNB Working Papers from Magyar Nemzeti Bank (Central Bank of Hungary)

Abstract: How does the additional debt issued by the government affect the term structure of interest rates? In this paper we identify Treasury supply shocks using intraday high-frequency data, by exploiting the institutional setup of the UK government bond primary market. We find that supply shocks have positive effects on nominal and real interest rates. Most of the reaction is due to real term and inflation risk premia rather than the expectation component of yields. We argue both theoretically and empirically that supply shocks transmit via the repricing of duration and inflation risks in the economy. We also document that these effects are stronger under adverse economic and financial conditions.

Keywords: Term structure; government debt; bond risk premia; high-frequency identification (search for similar items in EconPapers)
JEL-codes: E43 E44 E60 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2022
New Economics Papers: this item is included in nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:mnb:wpaper:2022/6

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