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Discussion Paper
Investor Diversity and Liquidity in the Secondary Loan Market
Santos, Joao A. C.; Shao, Pei (2017-08-09)
Over the last two decades, the U.S. secondary loan market has evolved from a relatively sleepy market dominated by banks and insurance companies that trade only occasionally to a more active market comprising a diversified set of institutional investors, including collateralized loan obligations (CLOs), loan mutual funds, hedge funds, pension funds, brokers, and private equity firms. This shift resulted from the growing presence of these investors in the syndicates of corporate loans, as shown in the chart below. In 1991 the average term loan had just two different types of investors; by 2013 ...
Liberty Street Economics , Paper 20170809

Discussion Paper
Discounting the Long-Run
Diamond, Peter A.; Yu, Rui; Adrian, Tobias; Crump, Richard K. (2015-08-31)
Expectations about the path of interest rates matter for many economic decisions. Three sources for obtaining information about such expectations are available. The first is extrapolation from historical data. The second consists of surveys of expectations. The third are expectations drawn from financial market prices, often referred to as market expectations. The last are usually considered to be model-based expectations, because, generally, a model is needed to reliably extract expectations from current prices. In this post, we explain the need for and usage of term structure models for ...
Liberty Street Economics , Paper 20150831

Discussion Paper
Preemptive Runs and the Offshore U.S. Dollar Money Market Funds Industry
Cipriani, Marco; La Spada, Gabriele (2021-11-22)
In March 2020, U.S. dollar-denominated prime money market funds (MMFs) suffered heavy outflows as concerns about the COVID-19 pandemic increased in the United States and Europe. Investors redeemed their shares en masse not only from funds domiciled in the United States (“domestic”) but also from offshore funds. In this post, we use differences in the regulatory regimes of domestic and offshore funds to identify the impact of the redemption gates and liquidity fees recently introduced as part of MMF industry reforms in both the United States and Europe.
Liberty Street Economics , Paper 20211122

Discussion Paper
Did Dealers Fail to Make Markets during the Pandemic?
Sarkar, Asani; Song, Zhaogang; Rubio, David; Chen, Jiakai; Liu, Haoyang (2021-03-24)
In March 2020, as the COVID-19 pandemic disrupted a range of financial markets, the ability of dealers to maintain liquid conditions in these markets was questioned. Reflecting these concerns, authorities took numerous steps, including providing regulatory relief to dealers. In this post, we examine liquidity provision by dealers in several financial markets during the pandemic: how much was provided, possible causes of any shortfalls, and the effects of the Federal Reserve’s actions.
Liberty Street Economics , Paper 20210324

Discussion Paper
Understanding the “Inconvenience” of U.S. Treasury Bonds
Du, Wenxin; Hébert, Benjamin; Li, Wenhao (2023-02-06)
The U.S. Treasury market is one of the most liquid financial markets in the world, and Treasury bonds have long been considered a safe haven for global investors. It is often believed that Treasury bonds earn a “convenience yield,” in the sense that investors are willing to accept a lower yield on them compared to other investments with the same cash flows owing to Treasury bonds’ safety and liquidity. However, since the global financial crisis (GFC), long-maturity U.S. Treasury bonds have traded at a yield consistently above the interest rate swap rate of the same maturity. The ...
Liberty Street Economics , Paper 20230206

Discussion Paper
Falling Oil Prices and Global Saving
Klitgaard, Thomas; Russo, Patrick (2015-06-24)
The rise in oil prices from near $30 per barrel in 2000 to around $110 per barrel in mid-2014 was a dramatic reallocation of global income to oil producers. So what did oil producers do with this bounty? Trade data show that they spent about half of the increase in total export revenues on imports and the other half to buy foreign assets. The drop in oil prices will unwind this process. Oil-importing countries will gain from lower oil bills, but they will also see a decline in their exports to oil-producing countries and in purchases of their assets by investors in these countries. Indeed, ...
Liberty Street Economics , Paper 20150624

Discussion Paper
Changing Risk-Return Profiles
Crump, Richard K.; Hundtofte , Sean; Giannone, Domenico (2018-10-04)
Are stock returns predictable? This question is a perennially popular subject of debate. In this post, we highlight some results from our recent working paper, where we investigate the matter. Rather than focusing on a single object like the forecasted mean or median, we look at the entire distribution of stock returns and find that the realized volatility of stock returns, especially financial sector stock returns, has strong predictive content for the future distribution of stock returns. This is a robust feature of the data since all of our results are obtained with real-time analyses ...
Liberty Street Economics , Paper 20181004

Working Paper
Differential Treatment in the Bond Market: Sovereign Risk and Mutual Fund Portfolios
Converse, Nathan L.; Mallucci, Enrico (2019-10-18)
How does sovereign risk affect investors' behavior? We answer this question using a novel database that combines sovereign default probabilities for 27 developed and emerging markets with monthly data on the portfolios of individual bond mutual funds. We first show that changes in yields do not fully compensate investors for additional sovereign risk, so that bond funds reduce their exposure to a country's assets when its sovereign default risk increases. However, the magnitude of the response varies widely across countries. Fund managers aggressively reduce their exposure to high-debt ...
International Finance Discussion Papers , Paper 1261

Discussion Paper
A Way With Words: The Economics of the Fed’s Press Conference
Rosa, Carlo; Duarte, Fernando M. (2013-11-25)
When central bankers speak, traders, journalists, and politicians listen with bated breath. The marked asset price reaction to Chairman Bernanke’s June press conference confirms the importance of his comments in the marketplace.
Liberty Street Economics , Paper 20131125

Discussion Paper
Treasury Term Premia: 1961-Present
Moench, Emanuel; Mills, Benjamin; Adrian, Tobias; Crump, Richard K. (2014-05-12)
Treasury yields can be decomposed into two components: expectations of the future path of short-term Treasury yields and the Treasury term premium. The term premium is the compensation that investors require for bearing the risk that short-term Treasury yields do not evolve as they expected. Studying the term premium over a long time period allows us to investigate what has historically driven changes in Treasury yields. In this blog post, we estimate and analyze the Treasury term premium from 1961 to the present, and make these estimates available for download here.
Liberty Street Economics , Paper 20140512

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