Identifying the Portfolio Balance Mechanism
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Series
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SpeakersJefferson Duarte (Rice University, United States)
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FieldEconometrics, Data Science and Econometrics
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LocationErasmus University Rotterdam, Campus Woudestein, ET-14
Rotterdam -
Date and time
May 08, 2025
12:00 - 13:00
Abstract
The Portfolio Balance Mechanism (PBM) theorizes that reducing the supply of U.S. Treasuries (USTs) increases their prices and prompts the creation of similar assets for preferred-habitat investors. We identify the PBM using the suspension of 30-year UST bond auctions between 2002 and 2005. The suspension announcement resulted in a 5.1% daily return on the 30-year UST bond and prompted the issuance of safe, long-term collateralized mortgage obligations (CMOs), created by tranching mortgage pools to meet the demand of life insurers (habitat-preference investors). The heterogeneity of USTs, CMOs and insurer types results in an unusually clean identification of the PBM.