Research

Working Papers

Anatomy of the Treasury Market: Who Moves Yields?

Manav Chaudhary, Zhiyu Fu, and Haonan Zhou

2024

Presentations: HKUST, Bank of Canada, Brown University, HBS Junior Finance Conference (2025), UCLA Conference on Financial Markets (2025), The Chicago Booth Treasury Markets Conference (2025), 11th International Conference on Sovereign Bond Markets, the 2025 OFR Rising Scholar Conference

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We develop a novel quantity-based framework to study the drivers of U.S. Treasury yields. Our method allows for flexible identification of price and factor sensitivities for heterogeneous investors in a demand-supply model using granular idiosyncratic shocks. Overall, a 1 percent demand increase for U.S. Treasury notes and bonds results in a 1 percent increase in prices, equivalent to a 10 basis points decline for the ten-year yield. We uncover substantial heterogeneity across investors and regimes in sectors’ sensitivity to Treasury yield changes and aggregate factors. Using the estimated model, we decompose changes in Treasury yields over the past two decades, and document three main findings: (i) Contrasting to the conventional wisdom, foreign investors contribute little to Treasury price appreciation during flight-to-safety episodes; (ii) U.S. banks and foreign investors becomes more price insensitive after the global financial crisis, while the Federal Reserve has stepped up its role as a state-contingent liquidity provider; (iii) while major foreign Treasury holders are the biggest contributor to Treasury yield compression before the financial crisis, the influence of foreign demand on Treasury yields has substantially weakened since 2010.
Capital Flows and the Making of Risky Currencies

2024

Awards: BlackRock’s Applied Research Award Finalist (2023), Best PhD Student Paper Award at Young Scholars Finance Consortium (2024)

Presentations: Colorado Finance Summit Job Market Session 2023, Yiran Fan Memorial Conference 2023, 18th Economics Graduate Students' Conference, 2024 Young Scholars Finance Consortium, 2024 BFI International Macro-Finance Conference

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A currency is considered risky if it depreciates during downturns. I show that currency risk is caused by foreign capital flows induced by heterogeneous responses of foreign and domestic investors to global shocks. I establish that foreign flows are “flighty”: foreign investors withdraw capital in response to negative news. Empirically, currency risk appears to play a limited role at most in driving this flightiness. However, consistent with an explanation based on heterogeneous beliefs, I find that foreign forecasts react more strongly to news, and their returns are relatively lower. Motivated by these findings, I develop a model in which foreign investors update their beliefs more strongly to negative shocks, creating flighty foreign flows. In the model, the relative flightiness of a country's external liabilities and external assets determines its currency risk. That is, if foreign holdings of domestic assets respond more to global shocks than do domestic holdings of foreign assets, the country's currency is risky (and vice versa for safe currencies). Based on this, I construct a model-informed measure, “net asset flightiness”— the difference between external assets and liabilities weighted by their specific flightiness, which I show strongly correlates with currency risk.
Corporate Bond Multipliers: Substitutes Matter

Manav Chaudhary, Zhiyu Fu, and Jian Li

revise & resubmit at the Review of Financial Studies

2024

Awards: TADC's AQR Asset Management Institute Prize for best economics paper

Presentations: NBER SI 2023 Asset Pricing, Columbia Business School, Trans-atlantic Doctoral Conference 2023, David Backus Memorial Conference on Macro-Finance, AFFECT 2023 mentorship workshop

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Many economic questions require estimating the price impact of demand shifts in the bond market. In spite of corporate bonds having salient characteristics that distinguish close versus distant substitutes, existing estimates of corporate bond multipliers (the price increase in response to demand shifts) typically assume that all bonds, regardless of their characteristics, are equally good substitutes. In this paper, we show that accounting for the heterogeneous substitutability between bonds is critical for estimating multipliers. By allowing rich heterogeneous substitution patterns among bonds, we demonstrate that security-level multipliers are an order of magnitude smaller than previously estimated and are essentially zero. Nonetheless, aggregated portfolios exhibit substantially larger multipliers, reflecting the reduced availability of near substitutes for more aggregated portfolios. Furthermore, we find that the price impact reverts after a quarter, and that the multiplier is larger for high-yield bonds, longer-maturity bonds, and bonds with greater arbitrage risks.
The Convenience Yield, Inflation Expectations, and Public Debt Growth

Zhiyu Fu, Jian Li, and Yinxi Xie

conditionally accepted at the Review of Financial Studies

2024

Presentations: MFA 2023, 2022 CEA annual conference, Summer Institute of Finance (SAIF, Shanghai) 2022, Midwest Macro Meeting, 2022

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U.S. long-term Treasury debt serves the important role of safe and liquid assets in the economy, hence carrying significant convenience yields. We present two new findings relating the convenience yield to inflation and government fiscal policy. First, the convenience yield of Treasury debt is negatively correlated with inflation expectations. Second, inflation expectations predict future debt-to-GDP growth at different horizons. To explain these findings, we incorporate convenience yields into a staggered-price model with a non-Ricardian fiscal policy. The convenience yield for long-term debt is the discounted value of future convenience service flows, thus negatively correlated with future debt supply. Furthermore, a government deficit shock leads to both higher debt in the future as well as higher expected inflation simultaneously. The model rationalizes the two empirical findings and provides a natural framework to study the interactions among inflation, debt growth, and cost of borrowing, particularly the convenience yield component.
Risk-Based Regulations in Credit Markets: A Heterogeneous Risk Accelerator

Zhiyu Fu

2023

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Credit markets in the U.S. are dominated by institutional investors, whose risk capacity is limited by various risk-based regulations. I study the macroeconomic implications of such risk-based regulations in a general-equilibrium model featuring firms with heterogeneous credit risks and a bond investor subject to risk-based constraints. During economic downturns, these risk-based constraints become a heterogeneous risk accelerator: It increases the debt financing cost for risky firms, amplifying their default risk, while generating convenience yields for the safest firms. In aggregate, these constraints significantly amplify the drop in investment and output. I evaluate the effects of credit market intervention programs using this framework. I find that during credit market disruptions, credit facilities mitigate the initial damage and speed up the follow-up recovery.
The Great Lockdown and the Big Stimulus: Tracing the Pandemic Possibility Frontier for the U.S.

Zhiyu Fu, Greg Kaplan, Benjamin Moll, and Giovanni L. Violante

2020

Presentations: Bank for International Settlements 2022, International Monetary Fund 2021, Mean Field Games in Economics 2020, Conference on Monetary Policy and Heterogeneity 2020, Banco Central de Chile 2020

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We provide a quantitative analysis of the trade-offs between health outcomes and the distribution of economic outcomes associated with alternative policy responses to the COVID-19 pandemic. We integrate an expanded SIR model of virus spread into a macroeconomic model with realistic income and wealth inequality, as well as occupational and sectoral heterogeneity. In the model, as in the data, economic exposure to the pandemic is strongly correlated with financial vulnerability, leading to very uneven economic losses across the population. We summarize our findings through a distributional pandemic possibility frontier, which shows the distribution of economic welfare costs associated with the different aggregate mortality rates arising under alternative containment and fiscal strategies. For all combinations of health and economic policies we consider, the economic welfare costs of the pandemic are large and heterogeneous. Thus, the choice governments face when designing policy is not just between lives and livelihoods, as is often emphasized, but also over who should bear the burden of the economic costs. We offer a quantitative framework to evaluate both trade-offs.