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Discussion Paper
Dealer Balance Sheet Capacity and Market Liquidity during the 2013 Selloff in Fixed-Income Markets
Lewis, Morgan; Goldberg, Jonathan; Fleming, Michael J.; Adrian, Tobias; http://fedora:8080/fcrepo/rest/objects/authors/; Natalucci, Fabio M. (2013-10-16)
Long-term interest rates hit record-low levels in 2012 but have since increased substantially. As discussed in an earlier post, the sharpest increase occurred between May 2 and July 5 of this year, with the ten-year Treasury yield rising from 1.63 percent to 2.74 percent. During the May-July episode, market liquidity also deteriorated. Some market participants have suggested that constraints on dealer balance sheet capacity impaired liquidity during the selloff, amplifying the magnitude and speed of the rise in interest rates and volatility. In this post, we review the evolution of Treasury ...
Liberty Street Economics , Paper 20131016a

Report
The microstructure of a U.S. Treasury ECN: the BrokerTec platform
Nguyen, Giang; Mizrach, Bruce; Fleming, Michael J. (2009-07-01)
We assess the microstructure of the U.S. Treasury securities market following its migration to electronic trading. We model price discovery using a vector autoregression model of price and order flow. We show that both trades and limit orders affect price dynamics, suggesting that traders also choose limit orders to exploit their information. Moreover, while limit orders have smaller price impact, their greater variation contributes more to the variance of price updates. Lastly, we find increased price impact of trades and especially limit orders following major announcements (such as FOMC ...
Staff Reports , Paper 381

Discussion Paper
Primary Dealers’ Waning Role in Treasury Auctions
Myers, Sean; Fleming, Michael J. (2013-02-20)
In this post, we quantify the macroeconomic effects of central bank announcements about future federal funds rates, or forward guidance. We estimate that a commitment to lowering future rates below market expectations can have fairly strong effects on real economic activity with only small effects on inflation.
Liberty Street Economics , Paper 20130220

Discussion Paper
The Indirect Costs of Lehman’s Bankruptcy
Sarkar, Asani; Denison, Erin; Fleming, Michael J. (2019-01-17)
In our previous post, we assessed losses to customers and clients from foregone opportunities after Lehman Brothers filed for bankruptcy in September 2008. In this post, we examine losses to Lehman and its investors in anticipation of bankruptcy. For example, if bankruptcy is expected, Lehman’s earnings may decline as customers close their accounts or certain securities (such as derivatives) to which Lehman is a counterparty may lose value. We estimate these losses by analyzing Lehman’s earnings and stock, bond, and credit default swap (CDS) prices.
Liberty Street Economics , Paper 20190117

Discussion Paper
Unlocking the Treasury Market through TRACE
Brain, Doug; De Pooter, Michiel; Dobrev, Dobrislav; Fleming, Michael J.; Johansson, Peter; Jones, Collin; Keane, Frank M.; Puglia, Michael; Reiderman, Liza; Rodrigues, Tony; Shachar, Or (2018-09-28)
This joint FEDS Note and Liberty Street Economics blog post from staff at the Board of Governors and Federal Reserve Bank of New York aims to share initial insights on the Treasury cash transactions data reported to Financial Industry Regulatory Authority (FINRA)'s Trade Reporting and Compliance Engine (TRACE).
FEDS Notes , Paper 2018-09-28-1

Discussion Paper
Corporate Bond Market Liquidity Redux: More Price-Based Evidence
Vogt, Erik; Fleming, Michael J.; Wojtowicz, Zachary; Adrian, Tobias (2016-02-09)
In a recent post, we presented some preliminary evidence suggesting that corporate bond market liquidity is ample. That evidence relied on bid-ask spread and price impact measures. The findings generated significant discussion, with some market participants wondering about the magnitudes of our estimates, their robustness, and whether such measures adequately capture recent changes in liquidity. In this post, we revisit these measures to more thoroughly document how they have varied over time and the importance of particular estimation approaches, trade size, trade frequency, and the ...
Liberty Street Economics , Paper 20160209

Journal Article
The microstructure of the TIPS market
Krishnan, Neel; Fleming, Michael J. (2012-03)
The potential advantages from the introduction of Treasury inflation-protected securities (TIPS) in 1997 have not been fully realized, mainly because TIPS are less liquid than nominal Treasury securities. The lack of liquidity is thought to adversely affect TIPS prices relative to prices of nominal securities, offsetting the benefits that come from TIPS having no inflation risk. Despite the importance of TIPS liquidity and the market?s large size, there is virtually no quantitative evidence on the securities? liquidity. This article sheds light on this phenomenon using novel tick data from ...
Economic Policy Review , Volume 18 , Issue Mar , Pages 27-45

Discussion Paper
Primary Dealer Participation in the Secondary U.S. Treasury Market
Keane, Frank M.; Schaumburg, Ernst; Fleming, Michael J. (2016-02-12)
The recent Joint Staff Report on October 15, 2014, exploring an episode of unprecedented volatility in the U.S. Treasury market, revealed that primary dealers no longer account for most trading volume on the interdealer brokerage (IDB) platforms. This shift is noteworthy because dealers contribute to long-term liquidity provision via their willingness to hold positions across days. However, a large share of Treasury security trading occurs elsewhere, in the dealer-to-customer (DtC) market. In this post, we show that primary dealers maintain a majority share of secondary market trading volume ...
Liberty Street Economics , Paper 20160212

Working Paper
Heat waves, meteor showers, and trading volume: an analysis of volatility spillovers in the U.S. Treasury market
Lopez, Jose A.; Fleming, Michael J. (1999)
The market for U.S. Treasury securities operates around-the-clock from the three main trading centers of Tokyo, London, and New York. We examine this market for volatility spillovers using the methodology employed by Engle, Ito, and Lin (1990) for the foreign exchange market. We find meteor showers in Tokyo and London but not New York; i.e., volatility spills over into Tokyo and London from the other trading centers, but not into New York. We also find that lagged trading volume significantly impacts U.S. Treasury yield volatility for the overseas trading centers, although it does not ...
Working Papers in Applied Economic Theory , Paper 99-09

Report
An index of Treasury Market liquidity: 1991-2017
Vogt, Erik; Adrian, Tobias; Fleming, Michael J. (2017-11-01)
Order book and transactions data from the U.S. Treasury securities market are used to calculate daily measures of bid-ask spreads, depth, and price impact for a twenty-six-year sample period (1991-2017). From these measures, a daily index of Treasury market liquidity is constructed, reflecting the fact that the varying measures capture different aspects of market liquidity. The liquidity index is then correlated with various metrics of funding liquidity, volatility, and macroeconomic conditions. The liquidity index points to poor liquidity during the 2007-09 financial crisis and around the ...
Staff Reports , Paper 827

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