Maturity Composition and the Demand for Government Debt

We analyze ways to reduce funding costs when issuing government debt, without changing the level of debt. Leveraging an institutional feature that auctions of different Treasury securities are held simultaneously, we propose and implement a method for estimating own-and cross-security demand elasticities, avoiding the usual endogeneity issues in demand estimation. We show that these elasticities, together with the auction format, determine how to optimally allocate debt across
securities. Starting from an equal supply split between two securities, a government can save money by issuing less of the price-sensitive and more of the price-insensitive security in a discriminatory price auction, and vice versa in a uniform price auction.