Bond supply expectations and the term structure of interest rates

This paper investigates the influence of forward-looking government bond supply information on changes in the term structure of interest rates. While traditional arbitrage-free models suggest that bond supply should not impact bond yields, models accounting for preferred-habitat investors and imperfect asset substitutability raise this possibility. By analysing debt supply expectations derived from Germany's Treasury press releases, we find that news about expected bond supply affects bond yields, supporting the notion that supply expectations influence current interest rates. Our study also extends macro-finance models, highlighting the significant role of supply expectations in term structure dynamics. Additionally, we provide insights into the puzzle of German government bond yields falling below the ECB deposit rate. • We use Treasury press releases to build debt supply expectations. • We measure the effect of changes in expected supply on changes in Treasury yields. • We introduce expected supply as a factor in a macro term structure model. • We tackle the puzzle of German bond yields below the ECB rate.