Susceptibility of the Yield on U.S. Treasury Securities to External Supply Shocks : VAR Analysis

This paper estimates a VAR model to assess the sensitivity of U.S. Treasury yields to supply shocks that may be triggered by massive sell-offs of Treasury securities by foreign holders. The results suggest that the Treasury yield was not very susceptible to changes in supply and that if China, currently holding $1.3 trillion of these assets, decided to sell off about half of the holdings, it would raise the 6-month and 1-year yield by only about 10 and 7 basis points respectively. The results also suggest that once the Treasury yields are pushed up by supply shocks, it would take about 3 years for interest rates to return to their pre-shock levels