The Demand for Government Debt

We document that the sectoral composition and marginal buyers of government debt differ notably across jurisdictions and over time. We use instrumental variables derived from monetary policy surprises to estimate the demand elasticities of various sectors. In the United States, commercial banks and mutual funds exhibit the most price-elastic demand, whereas the foreign official sector has a price-inelastic demand. Based on these estimates and under certain assumptions, we find that a 1% increase in the Central Bank holdings of U.S. Treasuries results in an around 8- to 13-basis-point drop in long-term yields depending on the market composition. Elasticities of individual sectors do not differ in a statistically significant manner when the Central Bank share in the Treasury market increases or decreases. However, different market compositions during various quantitative easing (QE) and quantitative tightening (QT) programs have led to an asymmetric effect with the impact of QE on yields being greater than that of QT. Our results suggest that, overall, the demand for U.S. Treasuries is considerably more elastic than for equities, corporate bonds, and emerging market sovereign bonds found in the literature. We also repeat the analysis for other jurisdictions and compare estimates for different sectors. This paper was accepted by Lukas Schmid, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2025.00332 .