Working Paper

Estimating Yield Impacts of Treasury Demand and Supply Changes

Abstract: We develop a rich demand system framework to quantify the yield effects of shifts in U.S. Treasury supply and demand. Our model captures time-varying holdings shares and estimates sectoral demand elasticities using instrumental variables. We find that the Treasury market has become increasingly price-sensitive over time, driven by the declining participation of less price-sensitive foreign official investors and the rising role of more price-sensitive hedge funds and other private investors. A $100 billion increase in Treasury supply currently raises five-year yields by approximately 3 basis points. We validate the model by showing that the shifts in investor base explain a significant portion of historical yield changes. Our framework provides a flexible tool for policy analysis and counterfactual scenarios, including the yield effects of foreign official investor sales and Federal Reserve balance sheet policies.

JEL Classification: E43; E52; G11; G12;

https://doi.org/10.17016/IFDP.2026.1447

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2026-09-18

Number: 1447