Flow and stock effects of large-scale treasury purchases: Evidence on the importance of local supply

D’Amico, Stefania and Thomas King
Authors registered in the RePEc Author Service: Stefania D'Amico

Journal of Financial Economics, 2013, vol. 108, issue 2, 425-448

Abstract: The Federal Reserve’s 2009 program to purchase $300 billion of US Treasury securities represented an unprecedented intervention in the Treasury market and provides a natural experiment with the potential to shed light on the price elasticities of Treasuries and theories of supply effects in the term structure. Using security-level data on Treasury prices and quantities during the course of this program, we document a ‘local supply’ effect in the yield curve—yields within a particular maturity sector responded more to changes in the amounts outstanding in that sector than to similar changes in other sectors. We find that this phenomenon was responsible for a persistent downward shift in yields averaging about 30 basis points over the course of the program (the “stock effect”). In addition, except at very long maturities, purchase operations caused an average decline in yields in the sector purchased of 3.5 basis points on the days when those operations occurred (the “flow effect”). The sensitivity of our results to security characteristics generally supports a view of segmentation or imperfect substitution within the Treasury market during this time.

Keywords: Yield curve; Quantitative easing; LSAP; Preferred habitat; Limits of arbitrage (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 E65 G12 G14 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (353)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:108:y:2013:i:2:p:425-448

DOI: 10.1016/j.jfineco.2012.11.007

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