Dealer Capacity and U.S. Treasury Market Functionality

Darrell Duffie, Michael Fleming, Frank M. Keane, Claire Nelson, Or Shachar and Peter Van Tassel

No 1070, Staff Reports from Federal Reserve Bank of New York

Abstract: We show a significant loss in U.S. Treasury market functionality when intensive use of dealer balance sheets is needed to intermediate bond markets, as in March 2020. Although yield volatility explains most of the variation in Treasury market liquidity over time, when dealer balance sheet utilization reaches sufficiently high levels, liquidity is much worse than predicted by yield volatility alone. This is consistent with the existence of occasionally binding constraints on the intermediation capacity of bond markets.

Keywords: Treasury market; liquidity; volatility; dealer intermediation; Value-at-Risk (search for similar items in EconPapers)
JEL-codes: E58 G01 G1 G12 G18 (search for similar items in EconPapers)
Pages: 70
Date: 2023-08-01
New Economics Papers: this item is included in nep-fmk and nep-mst
Note: Revised October 2023.
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Citations: View citations in EconPapers (3)

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Working Paper: Dealer capacity and US Treasury market functionality (2023)
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DOI: 10.59576/sr.1070

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