The Demand for Government Debt

We document that the sectoral composition and marginal buyers of government debt differ notably across jurisdictions and have evolved significantly over time. Focusing on the United States, we estimate the yield elasticity of demand across sectors using instrumental variables constructed from monetary policy surprises. Our estimates point to a 11 % increase in the demand by non-central-bank players for a 1 percentage point increase in long-term yields. Hence, a hypothetical reduction in the central bank balance sheet of around $215 billion increases long-term yields by 10 basis points. We find commercial banks, foreign private investors, pension funds, investment funds, and insurance companies to be the sectors whose demand is most sensitive to changes in long-term yields, but to varying degrees. Heterogeneous elasticities imply compositional shifts in the holders of government debt as central banks normalize balance sheets, which has policy implications