DP16082 The U.S. Public Debt Valuation Puzzle

Author(s): Zhengyang Jiang, Hanno Lustig, Stijn van Nieuwerburgh, Mindy Xiaolan
Publication Date: April 2021
Keyword(s): Convenience Yield, debt maturity, Fiscal policy, term structure
JEL(s): E32, E62, G12, H20
Programme Areas: Public Economics, Financial Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16082

The market value of outstanding federal government debt in the U.S. exceeds the expected present discounted value of current and future primary surpluses by a multiple of U.S. GDP. When the pricing kernel fits U.S. equity and Treasury prices and the government surpluses are consistent with U.S. post-war data, a government debt valuation puzzle emerges. Since tax revenues are pro-cyclical while government spending is counter-cyclical, the tax revenue claim has a higher short-run discount rate and a lower value than the spending claim. Since revenue and spending are co-integrated with GDP, the long-run risk discount rates of both claims are much higher than the long Treasury yield. These forces imply a negative present value of U.S. government surpluses. Convenience yields for Treasurys are much larger than previously thought and/or U.S. Treasury markets have failed to enforce the no-bubble condition.