Andreas Schrimpf's webpage

The Demand for Government Debt

Abstract:
We document that the sectoral composition and marginal buyers of government debt differ notably across jurisdictions and over time. For the United States, we use instrumental variables derived from monetary policy surprises to estimate the elasticity of demand of various sectors to long-term yields. Commercial banks and mutual funds exhibit the most price-sensitive demand, while the foreign official sector has a price-inelastic demand. Using these estimates, we find that a 1% increase in the central bank holdings of US Treasuries results in a 7-8 basis point drop in long-term yields and vice versa, with symmetric effects for quantitative easing and tightening. Our results suggest that the aggregate demand for US Treasuries is considerably more elastic than the markets for equities, corporate bonds and emerging market sovereign bonds. In counterfactual analyses, we estimate the total price impact of various QE and QT programs and the potential divestment of some reserve managers of US Treasuries.