U.S. Treasury Auctions: A High Frequency Identification of Supply Shocks

We present a novel identification strategy of U.S. Treasury supply shocks based on auction data. We interpret changes in Treasury futures prices around public announcements by the Treasury as shocks to the expected supply of debt securities by the U.S. government. After describing the theoretical mechanism between futures prices and expected debt supply, we isolate the component of price variation in futures pertaining to Treasury announcements between 1998 and 2020. We then study how Treasury supply affects financial markets by means of local projections, using our series of shocks as instrumental variables. We show that surprise increases in Treasury supply have sizable and significant dynamic causal effects on financial markets, as they cause an upward shift of the yield curve, fuelled in part by an increase in the term premium. While stock prices go up and volatility goes down, corporate bond yields increase. As a result, the equity premium rises,the risk premium falls, inflation expectations soar and the liquidity premium decreases.