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Discussion Paper
Understanding the “Inconvenience” of U.S. Treasury Bonds
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 ...
Discussion Paper
How Has Treasury Market Liquidity Evolved in 2023?
In a 2022 post, we showed how liquidity conditions in the U.S. Treasury securities market had worsened as supply disruptions, high inflation, and geopolitical conflict increased uncertainty about the expected path of interest rates. In this post, we revisit some commonly used metrics to assess how market liquidity has evolved since. We find that liquidity worsened abruptly In March 2023 after the failures of Silicon Valley Bank and Signature Bank, but then quickly improved to levels close to those of the preceding year. As in 2022, liquidity in 2023 continues to closely track the level that ...
Working Paper
Balancing Before and After: Treasury Market Reform Proposals and the Connections Between Ex-Ante and Ex-Post Liquidity Tools
This paper develops a simple framework that helps to draw out some of the potential connections between ex-ante liquidity risk management tools such as liquidity requirements or mandatory fees and ex-post liquidity tools such as a lender of last resort. A central message of this analysis is that policy actions that expand the lender of last resort function so as to better address periods of financial distress are likely to be most effective when accompanied by regulations or other mechanisms that encourage socially-responsible ex-ante liquidity risk management on the part of financial firms. ...
Discussion Paper
The Evolution of Workups in the U.S. Treasury Securities Market
The market for benchmark U.S. Treasury securities is one of the deepest and most liquid in the world. Although trading in the interdealer market for these securities is over-the-counter, it features a central limit order book (CLOB) similar to that found in exchange-traded instruments, such as equities and futures. A distinctive feature of this market is the ?workup? protocol, whereby the execution of a marketable order opens a short time window during which market participants can transact additional volume at the same price. With the broadening of the interdealer market to include hedge ...
Report
Are larger Treasury issues more liquid? Evidence from bill reopenings
This paper makes use of a natural experiment of the U.S. Treasury Department to examine the relationship between Treasury security issue size and liquidity. Treasury bills that were first issued with fifty-two weeks to maturity and then reopened at twenty-six weeks are shown to be more liquid than comparable maturity bills that were first issued with twenty-six weeks to maturity. The relationship is less pronounced when bills are on-the-run (the most recently auctioned bills of a given maturity) than when they are off-the-run, and persists when controlling for other factors that affect ...