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Speech
Gradual and predictable: reducing the size of the Federal Reserve’s balance sheet: remarks at SUERF – The European Money and Finance Forum, New York City
Remarks at SUERF ? The European Money and Finance Forum, New York City.
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. ...
Discussion Paper
U.S. Treasury Market Action on Election Night 2016
As the midterm elections approach, it?s worth revisiting the striking financial market response to the last federal elections in 2016. U.S. equity market futures and Treasury yields first plunged on election night 2016, as the presidential election results turned out closer than expected, but quickly rebounded after President Trump?s victory became clear, ultimately ending the day higher. In this post, I take a close look at the unusual U.S. Treasury market behavior that night, focusing on the market conditions and trading flows amid which the sharp yield changes took place.
Report
Market liquidity after the financial crisis
This paper examines market liquidity in the post-crisis era in light of concerns that regulatory changes might have reduced dealers? ability and willingness to make markets. We begin with a discussion of the broader trading environment, including an overview of regulations and their potential effects on dealer balance sheets and market making, but also considering additional drivers of market liquidity. We document a stagnation of dealer balance sheets after the financial crisis of 2007-09, which occurred concurrently with dealer balance sheet deleveraging. However, using high-frequency trade ...
Discussion Paper
Bank Supervisory Goals versus Monetary Policy Implementation
The global financial crisis of 2007–09 revealed substantial weaknesses in large banks' capital adequacy and liquidity. Bank regulators responded with a variety of prudential measures intended to strengthen both. However, these prudential measures resulted in conflicts with the implementation of monetary policy that helped alter the way the Federal Reserve conducts monetary policy. I review three such conflicts: regulation inhibiting interest on excess reserves arbitrage starting in 2008, regulation inhibiting banks' operations in the repo market in 2019, and regulation inhibiting their ...
Discussion Paper
How Does Tick Size Affect Treasury Market Quality?
The popularity of U.S. Treasury securities as a means of pricing other securities, managing interest rate risk, and storing value is, in part, due to the efficiency and liquidity of the U.S. Treasury market. Any structural changes that might affect these attributes of the market are therefore of interest to market participants and policymakers alike. In this post, we consider how a 2018 change in the minimum price increment, or tick size, for the 2-year U.S. Treasury note affected market quality, following our recently updated New York Fed staff report.
Report
Financial market implications of the federal debt paydown
U.S. Treasury securities fill several crucial roles in financial markets: they are a risk-free benchmark, a reference and hedging benchmark, and a reserve asset to the Federal Reserve and other financial institutions. Many of the features that make the Treasury market an attractive benchmark and reserve asset are likely to be adversely affected by the paydown of the federal debt, and recent developments suggest that this may be happening already. Market participants are responding by moving away from Treasuries as a reference and hedging benchmark toward agency debt securities, corporate debt ...
Report
The microstructure of a U.S. Treasury ECN: the BrokerTec platform
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 ...
Working Paper
Price Pressure and Price Discovery in the Term Structure of Interest Rates
We study the price pressure and price discovery effects in the U.S. Treasury market by using a term structure model. Our model decomposes yield curve shifts into two components: a virtually permanent change related to order flow and a transitory, price pressure effect due to dealer inventories. We find strong evidence that net dealer Treasury inventories has impact on the yield curve. Cash Treasury instruments in inventory have a larger impact on yields than futures contracts, suggesting that cash and futures inventories are not perfect substitutes. Price discovery in the level of interest ...
Report
Liquidity and volatility in the U.S. treasury market
We model the joint dynamics of intraday liquidity, volume, and volatility in the U.S. Treasury market, especially through the 2007-09 financial crisis and around important economic announcements. Using various specifications based on Bauwens and Giot?s (2000) Log- ACD(1,1) model, we find that liquidity, volume, and volatility are highly persistent, with volatility having a lower short-term persistence than the other two. Market liquidity and volume are important to explaining volatility dynamics but not vice versa. In addition, market dynamics change during the financial crisis, with all ...