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

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 significantly affect Treasury and private security yields. Furthermore, the yields on corporate bonds and equities are influenced disproportionately.