Working Paper: NBER ID: w9312
Authors: Francis A. Longstaff
Abstract: We examine whether there is a flight-to-liquidity premium in Treasury bond prices by comparing them with prices of bonds issued by Refcorp, a U.S. Government agency, which are guaranteed by the Treasury. We find a large liquidity premium in Treasury bonds, which can be more than fifteen percent of the value of some Treasury bonds. This liquidity premium is related to changes in consumer confidence, the amount of Treasury debt available to investors, and flows into equity and money market mutual funds. This suggests that the popularity of Treasury bonds directly a.ects their value.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in consumer confidence (D12) | Liquidity premium in treasury bonds (E43) |
| Supply of treasury securities available to investors (E43) | Liquidity premium in treasury bonds (E43) |
| Treasury bonds (H63) | Value increase relative to RefCorp bonds (G12) |
| Flight to liquidity (G19) | Liquidity premium in treasury bonds (E43) |