Treasury supply rise of $100 billion lifts yields by 3 basis points
A 100 billion dollar expansion in U.S. Treasury supply raises five-year yields by approximately 3 basis points, according to research by Federal Reserve economists Daniel Beltran and Canlin Li. The market has grown more price-sensitive as hedge funds replaced foreign official buyers.
From foreign reserves to leveraged funds
The study develops a demand system with time-varying holding shares to quantify yield impacts across 18 investor sectors.
Households and hedge funds exhibit the highest yield semi-elasticity at 40.5, while foreign official institutions register an elasticity of only 2.1 and commercial banks stand at minus 6.4. The aggregate market multiplier shows that a 100 billion dollar supply increase lifts five-year yields by 3.2 basis points today, down from 65 basis points in 2000 when public debt was 2.5 trillion dollars compared to 23.8 trillion dollars in 2026.
A hypothetical 500 billion dollar sale by foreign official investors increases yields by 14 basis points, whereas identical sales by hedge funds lift yields by 55 basis points.
Balance sheet runoff tests absorption
Simulations of Federal Reserve balance sheet runoff show significant upward pressure on borrowing costs.
Reducing central bank Treasury holdings to 5 percent of GDP over eight quarters adds 50 basis points to yields, with ongoing net issuance contributing another 62 basis points for a total increase of 112 basis points.
The authors note that while price-sensitive private buyers dampen yield fluctuations during tranquil periods, market liquidity becomes fragile when leveraged funds retreat during stress.
Elastic markets mask systemic fragility
The model delivers a sharp framework for tracking how investor shifts alter Treasury yields.
Relying on leveraged funds to absorb debt creates an illusion of market depth that vanishes under stress.
Central banks cannot expect private elasticity to replace structural liquidity backstops.