Essays on preferred habitats and the US Treasury market

Pires de Albuquerque, Filipe Manuel (2024) Essays on preferred habitats and the US Treasury market. PhD thesis, Birkbeck, University of London.

Abstract

This thesis seeks to contribute empirically to the literature on preferred habitat theory of the yield curve in three different ways. The first chapter presents a seemingly as-of-yet unexplored source of data on US Treasury bond holders provided by the US Treasury. The history of this data set and the vintages of its series are presented and explored as are the asset allocation practices relevant for each investor category. The second chapter investigates the claims of the preferred habitat theory of the term structure of the yield curve by regressing the term spread of the yield curve against the growth in the holdings of these investor categories, similarly to \citet{GreenwoodandVayanos2014}. Having subjected the results to a number of shocks, there is evidence to suggest the presence of heterogeneous preferred maturity habitats for the holdings of US Treasury securities across the investor taxonomy of the novel data set. However, the dynamics seem complex and sensitive to monetary policy, structural break, data uncertainty and the inclusion of short term interest rates. The third chapter provides a complementary approach where preferred habitats are estimated across all factors of the yield curve as per the dynamic \citet{NelsonSiegel1987} models. The results show evidence of different investors groups displaying distinct signs of short-term or long-term investment horizons. The last chapter considers the impact of the purchases of US Treasury bonds by different investor categories on a standard recession forecasting model based on the predictive power of the interest rate term spread. The results suggest that the term spread of the yield curve, credit spreads and non-durable consumption growth are significant predictors of recessions in the USA. The purchases of the Federal Reserve and of mutual funds appear to have a significant effect on the ability of the model to improve its prediction of recessions.

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