Finance

We examine whether there is a flight-to-liquidity premium in Treasury bond prices by comparing them with prices of bonds issued by Refcorp, a U.S. Government agency. Since Refcorp bonds are, in effect, guaranteed by the Treasury, they have the same credit as Treasury bonds. We find a large liquidity premium in Treasury bonds, which can be more than fifteen percent of the value of some Treasury bonds. We find strong evidence that this liquidity premium is related to changes in consumer con- fidence, flows into equity and money market mutual funds, and changes in foreign ownership of Treasury debt. This suggests that the popularity of Treasury bonds directly affects their value