Trading Costs v. Indicative Liquidity in the Off-the-Run Treasury Market

Oleg Sokolinskiy
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Oleg Sokolinskiy: https://www.federalreserve.gov/econres/oleg-v-sokolinskiy.htm

No 2025-049, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper estimates trading costs in the off-the-run Treasury market using comprehensive transactions data and machine learning techniques. The analysis reveals several key findings that enhance the understanding of the off-the-run Treasury market liquidity. First, the indicative bid-ask spread is shown to be a biased measure of liquidity, even when not considering transaction volume. Specifically, bid-ask spreads systematically overstate trading costs of more seasoned Treasuries, and the liquidity of benchmark, on-the-run securities affects how off-the-run bid-ask spreads map to trading costs. Second, the paper demonstrates that trading costs may scale non-monotonically with transaction volume, which suggests selective, opportunistic liquidity-taking. Additionally, transaction size has greater effect on off-the-run securities' trading costs when benchmark, on-the-run liquidity is lower. Finally, indicative bid-ask spreads may notably overstate trading costs for larger orders of relatively less liquid securities. These findings contribute to our understanding of actual liquidity in the off-the-run Treasury market, while highlighting the limitations of a traditional liquidity measure. By providing a more nuanced view of trading costs, this study contributes valuable insights for supporting financial stability and optimal asset allocation.

Keywords: Liquidity; Treasury market; Off-the-run; Effective bid-ask spread (search for similar items in EconPapers)
JEL-codes: G10 G12 (search for similar items in EconPapers)
Pages: 44 p.
Date: 2025-07-07
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2025-49

DOI: 10.17016/FEDS.2025.049

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