Search Results
Working Paper
Optimal Debt Dynamics, Issuance Costs, and Commitment
We investigate optimal capital structure and debt maturity policies in the presence of fixed issuance costs. We identify the global-optimal policy that generates the highest values of equity across all states of nature consistent with limited liability. The optimal policy without commitment provides almost as much tax benefits to debt as does the global-optimal policy and, in the limit of vanishing issuance costs, allows firms to extract 100% of EBIT. This limiting case does not converge to the equilibrium of DeMarzo and He (2019), who report no tax benefits to debt when issuance costs are ...
Discussion Paper
Information on Dealer Activity in Specific Treasury Issues Now Available
The New York Fed has long collected market information from its primary dealer trading counterparts and released these data in aggregated form to the public. Until recently, such data have only been available for broad categories of securities (for example, Treasury bills as a group) and not for specific securities. In April 2013, the Fed began releasing data on some specific Treasury issues, allowing for a more refined understanding of market conditions and dealer behavior.
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 ...
Discussion Paper
Breaking Down TRACE Volumes Further
Following an earlier joint FEDS Note and Liberty Street Economics blog post that examined aggregate trading volume in the Treasury cash market across venues, this post looks at volume across security type, seasoned-ness (time since issuance), and maturity. The analysis, which again relies on transactions recorded in the Financial Industry Regulatory Authority's (FINRA) Trade Reporting and Compliance Engine (TRACE), sheds light on perceptions that some Treasury securities—in particular those that are off-the-run—may not trade very actively. We confirm that most trading volume is made up of ...
Discussion Paper
Unlocking the Treasury Market through TRACE
The U.S. Treasury market is widely regarded as the deepest and most liquid securities market in the world, playing a critical role in the global economy and in the Federal Reserve’s implementation of monetary policy. Despite the Treasury market’s importance, the official sector has historically had limited access to information on cash market transactions. This data gap was most acutely demonstrated in the investigation of the October 15, 2014, flash event in the Treasury market, as highlighted in the Joint Staff Report (JSR). Following the JSR, steps were taken to improve regulators’ ...
Discussion Paper
Primary Dealer Participation in the Secondary U.S. Treasury Market
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 ...
Newsletter
The impact of the pandemic and the Fed’s muni program on Illinois muni yields
We estimate a simple model in which variations in Illinois daily municipal bond yields are explained by high-frequency indicators summarizing economic and public health conditions in Illinois, as well as key changes in the Federal Reserve’s Municipal Liquidity Facility (or MLF). We find that the MLF appears to have reduced Illinois muni yields by more than 200 basis points.
Working Paper
Are Household Investors Noise Traders: Evidence from Belief Dispersion and Stock Trading Volume
We document a robust positive relationship between the belief dispersion about macroeconomic conditions among household investors and the stock market trading volume, using more than 30 years of household survey data and a novel approach to measuring belief dispersions. Notably, such a relationship prevails even after various series of professional analysts' belief dispersions are controlled for. Consistent with a causal effect, such a relationship is most pronounced for belief dispersion among individuals who are most likely to own stocks and for trading volume of stocks that are most ...
Report
Measuring treasury market liquidity
This paper examines a comprehensive set of liquidity measures for the U.S. Treasury market. The measures are analyzed relative to one another, across securities, and over time. I find highly significant price impact coefficients, such that a simple model that explains price changes with net order flow produces an R statistic above 30 percent for the two-year note. The price impact coefficients are highly correlated with bid-ask spreads and with episodes of reported poor liquidity (such as the fall 1998 financial markets turmoil). Quote and trade sizes correlate modestly with these episodes ...
Discussion Paper
Treasury Market When-Issued Trading Activity
When the U.S. Treasury sells a new security, the security is announced to the public, auctioned a number of days later, and then issued sometime after that. When-issued (WI) trading refers to trading of the new security after the announcement but before issuance. Such trading promotes price discovery, which may reduce uncertainty at auction, potentially lowering government borrowing costs. Despite the importance of WI trading, and the advent of Treasury trading volume statistics from the Financial Industry Regulatory Authority (FINRA), little is known publicly about the level of WI activity. ...