GSE Debt and the Decline in the Treasury Market.

As a result of the economic expansion during the late 1990s, the size of the federal debt has declined significantly. Contemporaneous with this reduction in Treasury debt, growth in federal agency debt has been remarkable. Understanding the impact of the decline in federal debt outstanding on the GSE debt market is of critical importance to policymakers involved in the debate regarding the costs and benefits of the GSEs' Congressional charter. Thus, this paper separates the liquidity effect of GSE benchmark creation from the substitution effect resulting from the reduction in the Treasury debt market.