Reading 6, “Flight to Safety and U. S. Treasury Securities. ” (Chapters 5, 6) In this reading, “Flight to Safety and U. S. Treasury Securities”, Noeth and Sengupta discuss trends in short- and long-term yields since the beginning of the financial crisis in 2007 and explain why yields on U. S. Treasuries declined despite the increasing supply of those securities sold in government auctions. 1. Define the following terms used in the reading: a. b. c. d. . f. g. h. i. j. 2. 3. Treasuries default risk safe haven Treasury bills Treasury notes and bonds Treasury Inflation Protected Securities Aaa and Baa corporate bonds liquidity yield curve risk premium What do Noeth and Sengupta mean by “the flight to safety? ” What is “flying,” why is it “flying,” and to where is it “flying? ” Figure 2 in the reading tracks yields on Three-Month Treasury bills, 10-Year Treasury bonds, and Aaa and Baa corporate bonds.
Since August 2007, what has happened to a. b. c. the yields on these securities? the Treasury yield curve? the risk premium on corporate bonds? Why have these changes occurred? 4. Noeth and Sengupta marvel that despite a large increase in the supply of Treasury securities since the financial crisis began, the yields on those securities actually fell. a. b. Why did this increase in Treasury security offerings occur?
Other things remaining constant, how would an increase in bond supply affect yields on Treasury securities? Illustrate your answer with a bond demand and supply diagram. c. How do Noeth and Sengupta explain the decline in Treasury yields? Illustrate their explanation in the diagram you drew for part b. Source: “Flight to Safety and U. S. Treasury Securities. ” Bryan Noeth and Rajdeep Sengupta, Regional Economist, Federal Reserve Bank of St. Louis, July 2010, 18-19.