PT - JOURNAL ARTICLE AU - Peng Zhang TI - Relative Shortage of Long-Term Treasury Securities and the Flat Yield Curve AID - 10.3905/jfi.2019.1.078 DP - 2019 Dec 31 TA - The Journal of Fixed Income PG - 68--76 VI - 29 IP - 3 4099 - https://pm-research.com/content/29/3/68.short 4100 - https://pm-research.com/content/29/3/68.full AB - This article investigates the linkage between the interest rates term spread and the relative supply factor of long-term Treasury securities since the Debt Ceiling Crisis of 2013. The spread between the long-term Treasury yield and the Federal Funds Rate is defined as the excess return of holding long-term Treasury securities over liquid money. Evidences show that the supply factor has some significant impacts on the term spread between the 10-year yield and the Federal Funds Rate. These effects include long-run causality effect and persistent positive shock. The supply factor explains over a half of the term spread variation at longer horizons. The effects of the supply factor are stronger for the long-term part of the spread. So the recent flattening of the yield curve is partially attributable to the restrictions on the long-term financing of the government. Considering this mechanism, if Congress and the government reach agreements on some other long-term financing tools, the long-term Treasury yields and the term spread may rise unexpectedly.TOPICS: Fundamental equity analysis, accounting and ratio analysis, technical analysis