What Treasury Auctions Reveal About Investor Demand

Abstract

We measure the elasticity of demand for Treasuries at auction directly from bidding data. From 1992 to 2010, demand for Treasuries was surprisingly elastic: a 1% increase in the supply of Treasuries relative to the amount outstanding corresponded to a 2 basis point increase in long-term yields. Since 2010, demand has become almost five times more inelastic, implying that yields now rise by 9 basis points per 1% increase in supply. This deterioration of demand is also apparent in the secondary market. Prior to 2010, long-term yields declined on average by 1.5 basis points after auctions and these declines have been concentrated in auctions with strong investor demand. After 2010, this trend has reversed and yields no longer fall after auctions. This weaker demand for Treasuries coincides with less foreign investor demand and reduced secondary market liquidity.