International Finance Discussion Papers (IFDP)
September 2026
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.
Keywords: balance sheet policies, Treasury markets, asset pricing, demand elasticity, foreign official sales, term premium
DOI: https://doi.org/10.17016/IFDP.2026.1447
PDF: Full Paper
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