Intermediary Balance Sheets and the Treasury Yield Curve / Wenxin Du, Benjamin M. Hébert, Wenhao Li.

Format:

Book

Author/Creator:

Du, Wenxin.

Contributor:

National Bureau of Economic Research.

Hébert, Benjamin M.

Li, Wenhao.

Series:

Working Paper Series (National Bureau of Economic Research) no. w30222.

NBER working paper series no. w30222

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2022.

Summary:

We document a regime change in the Treasury market post-Global Financial Crisis (GFC): dealers switched from net short to net long Treasury bonds. We construct "net-long" and "netshort" curves that account for balance sheet and financing costs, and show that actual yields moved from the net short curve pre-GFC to the net long curve post-GFC. Our theory shows the regime shift caused negative swap spreads and co-movement among swap spreads, dealer positions, and covered-interest-parity violations. Furthermore, the effects of various monetary and regulatory policies are regime-dependent. We highlight Treasury supply as a plausible driver of this regime shift.

Notes:

Print version record

July 2022.