The Effect of Federal Debt-Management Policy on Corporate Bond and Equity Yields

Abstract

In theory, Federal debt-management policy potentially plays an important role in determining Treasury and private security yields. However, empirical studies have been unable to detect any significant effects from Federal debt-management. In large part the insignificance of relative asset supply effects associated with Federal debt-management policy may result from the use of unrestricted reduced-form models of interest rate determination. Using a disaggregated structural model of the markets for corporate bonds, equities, and four distinct maturity classes of Treasury securities, Federal debt-management policy is found to affect Treasury and private security yields significantly. Furthermore, the yields on corporate bonds and equities are influenced disproportionately.