Identifying the Portfolio Balance Mechanism

EI Seminar
Person holds empty wallet open.

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. 

Speaker
Jefferson Duarte
Date
Thursday 8 May 2025, 12:00 - 13:00
Type
Seminar
Room
ET-14
Location
Campus Woudestein
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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.

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More information

Do you want to know more about the event? Contact the secretariat Econometrics at eb-secr@ese.eur.nl.

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