TY  - JOUR
AU  - Krishnamurthy,Arvind
AU  - Vissing-Jorgensen,Annette
TI  - The Demand for Treasury Debt
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12881
PY  - 2007
Y2  - January 2007
UR  - http://www.nber.org/papers/w12881
L1  - http://www.nber.org/papers/w12881.pdf
N1  - Author contact info:
Arvind Krishnamurthy
Kellogg School of Management
Northwestern University
2001 Sheridan Road
Evanston, IL 60208
Tel: 847/491-2671
Fax: 847/491-5719
E-Mail: a-krishnamurthy@northwestern.edu

Annette Vissing-Jorgensen
Finance Department
Kellogg School of Management
Northwestern University
2001 Sheridan Road
Evanston, IL  60208-2001
Tel: 847/467-6171
Fax: 847/491-5719
E-Mail: a-vissing@northwestern.edu
M2  - featured in NBER digest on 2007-08-01
AB  - We show that the US Debt/GDP ratio is negatively correlated with the spread between corporate bond yields and Treasury bond yields. The result holds even when controlling for the default risk on corporate bonds. We argue that the corporate bond spread reflects a convenience yield that investors attribute to Treasury debt. Changes in the supply of Treasury debt trace out the demand for convenience by investors. We show that the aggregate demand curve for the convenience provided by Treasury debt is downward sloping and provide estimates of the elasticity of demand. We analyze disaggregated data from the Flow of Funds Accounts of the Federal Reserve and show that individual groups of Treasury holders also have downward sloping demand curves. Even groups with the most elastic demand curves have demand curves that are far from flat. The results have bearing for important questions in finance and macroeconomics. We discuss implications for the behavior of corporate bond spreads, interest rate swap spreads, the riskless interest rate, and the value of aggregate liquidity. We also discuss the implications of our results for the financing of the US deficit, Ricardian equivalence, and the effects of foreign central bank demand on Treasury yields.
ER  -