The Flight-to-Liquidity Premium in U.S. Treasury Bond Prices
Francis A. Longstaff
NBER Working Paper No. 9312
We examine whether there is a flight-to-liquidity premium in Treasury bond prices by comparing them with prices of bonds issued by Refcorp, a U.S. Government agency, which are guaranteed by the Treasury. We find a large liquidity premium in Treasury bonds, which can be more than fifteen percent of the value of some Treasury bonds. This liquidity premium is related to changes in consumer confidence, the amount of Treasury debt available to investors, and flows into equity and money market mutual funds. This suggests that the popularity of Treasury bonds directly a.ects their value.
Published: Longstaff, Francis A. "The Flight-to-Liquidity Premium in U.S. Treasury Bond Prices." Journal of Business 77, 3 (July 2004): 511-26.