Monetary policy financial transmission and treasury liquidity premia

Maxime Phillot and Samuel Reynard

No 2021-14, Working Papers from Swiss National Bank

Abstract: We quantify the effects of monetary policy shocks on the yield curve through their impact on Treasury liquidity premia. When the Fed raises interest rates, the spread between less-liquid assets and Treasuries of the same maturity and risk increases, as the liquidity value of holding Treasuries increases when the aggregate volume of banks’ customer deposits decreases. The longer the maturity is, the smaller - but still significant - the increase in the liquidity premium is, as longer-term Treasuries are less liquid. Due to this change in liquidity premia, the spread between a 10-year Treasury bond and a 3-month T-bill yield increases by approximately 5 basis points for a one-percentage-point increase in the policy rate, i.e., the Treasury yield curve steepens, ceteris paribus.

Keywords: Treasury liquidity premia; monetary policy; yield curve; deposit channel (search for similar items in EconPapers)
JEL-codes: E41 E43 E52 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2021
New Economics Papers: this item is included in nep-ban, nep-cba, nep-isf, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:snb:snbwpa:2021-14

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