Intermediary balance sheets and the treasury yield curve

Wenxin Du, Benjamin Hebert and Wenhao Li

Journal of Financial Economics, 2023, vol. 150, issue 3

Abstract: We document a regime change in the Treasury market post-Global Financial Crisis (GFC): dealers switched from net short to net long Treasury bonds. We construct “net-long” and “net-short” curves that account for balance sheet and financing costs, and show that actual yields moved from the net short curve pre-GFC to the net long curve post-GFC. Our theory shows the regime shift caused negative swap spreads and co-movement among swap spreads, dealer positions, and covered-interest-parity violations. Furthermore, the effects of various monetary and regulatory policies are regime-dependent. We highlight Treasury supply as a plausible driver of this regime shift.

Keywords: Treasury bonds; Covered interest parity; Arbitrage; Intermediary asset pricing (search for similar items in EconPapers)
JEL-codes: E5 F3 G1 G2 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Intermediary Balance Sheets and the Treasury Yield Curve (2022)
Working Paper: Intermediary Balance Sheets and the Treasury Yield Curve (2022)
Working Paper: Intermediary Balance Sheets and the Treasury Yield Curve (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:150:y:2023:i:3:s0304405x23001629

DOI: 10.1016/j.jfineco.2023.103722

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