Working Paper: NBER ID: w29081
Authors: Matthias Fleckenstein; Francis A. Longstaff
Abstract: It is widely believed that Treasuries trade at premium prices because of their safety and money-like properties. In reality, this is only true on a relative basis when compared to other bonds, but is often not true on an absolute basis. Many Treasuries have repeatedly traded at substantial discounts to their intrinsic fair values for extended periods during the past 25 years. Since 2015, Treasuries have consistently been priced at an aggregate discount of $100 to $300 billion below their fair values. Treasuries often actually become cheaper following crises. These results provide new perspectives on safe-asset theories.
Keywords: Treasury securities; Asset pricing; Liquidity; Market confidence
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| treasury richness (H63) | opportunity cost of holding money (E41) |
| treasury richness (H63) | liquidity-of-last-resort theory (E44) |
| price of gold (E39) | treasury premia (H63) |
| maturity-related liquidity effects (E41) | pricing of treasury securities (G12) |
| outstanding notional amount of previously auctioned treasury notes (H63) | treasury richness (H63) |
| supply of treasury debt (H63) | treasury richness (H63) |
| foreign demand for treasury securities (H63) | treasury richness (H63) |