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Report
Intermediary Balance Sheets and the Treasury Yield Curve
We have documented a regime change in the U.S. Treasury market post-Global Financial Crisis (GFC). We first derived bounds on Treasury yields that account for dealer balance sheet costs, which we call the net short and net long curves. We show that actual Treasury yields moved from the net short curve pre- GFC to the net long curve post-GFC, consistent with the shift in the dealers’ net position. We then use a stylized model to demonstrate that increased bond supply and tightening leverage constraints can explain this change in regime. This change, in turn, helps explain negative swap ...
Report
Banks’ Balance-Sheet Costs, Monetary Policy, and the ON RRP
Using a quasi-natural experiment, we show that quantitative easing (QE) interacts with bank regulation, impacting the size and portfolio choices of non-banks. In 2021, upon the expiration of the Supplementary Leverage Ratio (SLR) relief, banks were incentivized to reduce leverage, shedding deposits and reducing the supply of wholesale debt. We show that as a result, moneymarket funds (MMFs) experienced large inflows and shifted their portfolios toward the Federal Reserve’s ONRRP facility. Our results imply that when non-banks can access the central-bank balance sheet, they end up holding a ...
Discussion Paper
Banks’ Balance-Sheet Costs and ON RRP Investment
Daily investment at the Federal Reserve’s Overnight Reverse Repo (ON RRP) facility increased from a few billion dollars in March 2021 to more than $2.3 trillion in June 2022 and has stayed above $2 trillion since then. In this post, which is based on a recent staff report, we discuss two channels—a deposit channel and a wholesale short-term debt channel—through which banks’ balance-sheet costs have increased investment by money market mutual funds (MMFs) in the ON RRP facility.