Intermediary Balance Sheets and the Treasury Yield Curve

Wenxin Du, Benjamin Hebert and Wenhao Li ()
Additional contact information
Wenhao Li: https://www.marshall.usc.edu/personnel/wenhao-li

No 1023, Staff Reports from Federal Reserve Bank of New York

Abstract: We have documented a regime change in the U.S. Treasury market post-Global Financial Crisis (GFC). We first derived bounds on Treasury yields that account for dealer balance sheet costs, which we call the net short and net long curves. We show that actual Treasury yields moved from the net short curve pre- GFC to the net long curve post-GFC, consistent with the shift in the dealers’ net position. We then use a stylized model to demonstrate that increased bond supply and tightening leverage constraints can explain this change in regime. This change, in turn, helps explain negative swap spreads and the co-movement between swap spreads, dealer positions, yield curve slope, and covered-interest-parity violations, and implies changing effects for a wide range of monetary and regulatory policy interventions.

Keywords: yield curve; balance sheet constraints; CIP deviations (search for similar items in EconPapers)
JEL-codes: E52 F3 G12 (search for similar items in EconPapers)
Pages: 106
Date: 2022-07-01
New Economics Papers: this item is included in nep-acc, nep-fmk and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1023.pdf Full text (application/pdf)
https://www.newyorkfed.org/research/staff_reports/sr1023.html Summary (text/html)

Related works:
Journal Article: Intermediary balance sheets and the treasury yield curve (2023)
Working Paper: Intermediary Balance Sheets and the Treasury Yield Curve (2022)
Working Paper: Intermediary Balance Sheets and the Treasury Yield Curve (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:94462

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Staff Reports from Federal Reserve Bank of New York Contact information at EDIRC.
Bibliographic data for series maintained by Gabriella Bucciarelli ().