Keywords: CAPM, risk, corporate securities, government debt
Abstract: If current projections of future budget surpluses materialize, investing in
Treasury securities--an asset class with which investors have long been
familiar--could eventually become a thing of the past. In this paper, I
examine the extent to which investors' portfolio allocation decisions are
likely to be affected by the retirement of all federal government debt.
The analysis suggests only small effects for most investors, especially, as
is effectively the case for many institutional investors, when a no short
sale constraint is in place. Under such circumstances, highly conservative
investors--whose portfolios have risk-return characteristics akin to money
market instruments--and very aggressive investors--who hold mostly
equities--stand to be the least affected by the removal of Treasuries from
the pool of investable assets. The analysis abstracts from indirect
beneficial effects on investors from a Treasury debt payoff, such as the
potential for greater productivity growth (and faster wealth accumulation)
as more resources are freed up for investment in the private sector.
Full paper (71 KB PDF)
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Last update: February 20, 2001