Job market paper

Deconstructing debt supply shocks using Treasury auction announcements

Although public debt in the US is at a historical high, the effects of changes in public debt supply are unclear. There are two main reasons why. First, debt supply is jointly determined with the rest of the economy - the Treasury takes multiple economic factors into account while implementing debt management policy. Second, debt supply changes combine two distinct phenomena - a change in the total level of debt, and a change in issuance across maturities for a given level of debt. In this paper, I use a novel identification design to estimate shocks to the level and maturity structure of public debt supply in the US. Using high-frequency changes in Treasury futures prices around auction announcements, I first isolate exogenous changes in public debt supply. Next, I use narrative evidence to identify subsets of announcements that have high information on either debt level or maturity. Exploiting differences in the variance of level and maturity shocks across subsets, I estimate a factor model and separately identify the two shocks. I find that an increase in debt level and maturity leads to higher bond returns and yields. An increase in debt level leads to lower output and employment while an increase in debt maturity leads to higher output and employment.

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