Can U.S. Treasury Markets Add and Subtract?

Abstract

The CBO cost releases of legislative proposals contain valuable news about surpluses priced in by Treasury investors. Using daily event windows, we find that cost releases with large negative cash flows lowered Treasury valuations by more than 20% between 1997-2022, a sample marked by a significant shift in U.S. fiscal policy. The valuation effects are concentrated at longer maturities, with an overall increase of 4% in long-term nominal yields driven by an increase in term premia and inflation expectations and a decrease in convenience yields. In an estimated model where investors use the cost releases to learn about long-run deficits, we find that 57 cents of every dollar in the fiscal expansion is passed through to Treasury valuations, and a 1% surprise increase in the expected debt-to-GDP corresponds to an increase of the 10-year nominal yield by 31 bps and a drop in the convenience yield by 7.5 bps.