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Abstract "This paper considers whether diminishing government bond supply has driven government bond prices above levels consistent with economic fundamentals. By assuming the swap market is unaffected by supply side considerations and by developing an expression for the fair value for the swap spread, we use swap spreads as a measure of the possible divergence between government yields and true risk-free rates. By investigating swap spreads across currencies and maturities, we find evidence that, in both the United Kingdom and the United States, government bond yields have been depressed below risk-free rates. Although this bias has corresponded with reductions in net issuance, it is difficult to identify a robust statistical relationship between issuance and the swap spread. This paper also examines two specific issues which arise when government bonds cease to accurately reflect risk-free rates: (i) how policymakers should measure the risk-free term structure in the presence of distortions to the yield curve; and (ii) how bond market participants price non-government bonds in the absence of a risk-free benchmark."

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