Economics Webinar - Anatomy of the Treasury Market: Who Moves Yields?

We develop a novel demand-based framework to study the drivers of U.S. Treasury yields. Our method allows for flexible identification of sector-level price and factor elasticities in an asset demand system using granular shocks to other sectors’ flows. Overall, 1 percent demand increase for U.S. Treasury notes and bonds results in yields declining by 10 basis points, indicating a macro market multiplier of 0.83. We uncover substantial heterogeneity and regime shifts in 
sectors’ sensitivity to Treasury yield changes. Using the estimated system, we decompose changes in Treasury yields over the past two decades, and document three main findings: (i) foreign investors’ contribution to Treasury price appreciation during flight-to-safety episodes are smaller than previously thought; (ii) the impact of foreign demand on Treasury yields substantially weakens over time; (iii) U.S. banks and foreign investors becomes more price inelastic after the global financial crisis, while the Federal Reserve has stepped up its role as a state-contingent liquidity provider.