Liquidity, Maturity, and the Yields on U.S. Treasury Securities




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    • Graduate School of Business, New York University, New York, and Faculty of Management, Tel Aviv University, Tel Aviv; and Graduate School of Business, Stanford University, Stanford, CA; respectively. This paper was first drafted while the second author was with The William E. Simon Graduate School of Business “Administration, University of Rochester, Rochester, NY. The authors thank Kenneth Garbade, William Silber, and an anonymous referee for valuable suggestions and First Boston Corporation for providing the data.


The effects of asset liquidity on expected returns for assets with infinite maturities (stocks) are examined for bonds (Treasury notes and bills with matched maturities of less than 6 months). The yield to maturity is higher on notes, which have lower liquidity. The yield differential between notes and bills is a decreasing and convex function of the time to maturity. The results provide a robust confirmation of the liquidity effect in asset pricing.