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

The effects of asset liquidity on expected returns, shown by Amihud and Mendelson (1986, 1989) 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.