Discussion paper

DP16082 The U.S. Public Debt Valuation Puzzle

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.


Jiang, Z, H Lustig, S Van Nieuwerburgh and M Xiaolan (2021), ‘DP16082 The U.S. Public Debt Valuation Puzzle‘, CEPR Discussion Paper No. 16082. CEPR Press, Paris & London. https://cepr.org/publications/dp16082