Measuring treasury market liquidity

This paper was presented at the conference "Economic Statistics: New Needs for the Twenty-First Century," cosponsored by the Federal Reserve Bank of New York, the Conference on Research in Income and Wealth, and the National Association for Business Economics, July 11, 2002. Securities liquidity is important to those who transact in markets, those who monitor market conditions, and those who analyze market developments. This article estimates and evaluates a comprehensive set of liquidity measures for the U.S. Treasury securities market. The author finds that the commonly used bid-ask spread-the difference between bid and offer prices-is a useful measure for assessing and tracking liquidity. The spread is highly correlated with a more sophisticated price impact measure and is correlated with episodes of reported poor liquidity in the expected manner. He also finds that other measures correlate less strongly with episodes of poor liquidity and with the bid-ask spread and price impact measures, indicating that they are only modest proxies for market liquidity. Trading volume and trading frequency, in particular, are found to be weak proxies for market liquidity, as both high and low levels of trading activity are associated with periods of poor liquidity.Liquidity (Economics) ; Treasury bills ; Treasury notes ; Government securities

Who buys Treasury securities at auction?

The U.S. Treasury Department now releases fuller information about its auctions than in the past, including new information on investor class and bidder category. The investor class data shed light on the distribution of demand for government securities, and the bidder category data, released first, offer an early read on demand. Purchases by indirect bidders, in particular, are a fairly good proxy for foreign purchases of Treasury notes, but not Treasury bills.Auctions ; Treasury notes ; Treasury bills ; Government securities

The benchmark U.S. Treasury market: recent performance and possible alternatives

Forecasting ; Economic indicators ; Treasury bills ; Government securities ; Budget ; Debts, Public

Income effects of Federal Reserve liquidity facilities

One of the chief actions taken by the Federal Reserve in response to the financial crisis was the introduction or expansion of facilities designed to provide liquidity to the funding markets. A study of the programs suggests that the liquidity facilities generated $20 billion in interest and fee income between August 2007 and December 2009, or$13 billion after taking into account the estimated $7 billion cost of funds. Moreover, the Fed took important steps to limit the credit exposure it incurred in connection with the facilities.Federal Reserve System ; Liquidity (Economics) ; Bank liquidity ; Treasury bills ; Federal Reserve banks - Profits

What financing data reveal about dealer leverage

The Federal Reserve collects data on the financing activities of the primary government securities dealers. Some market analysts argue that the data show a considerable rise in dealer leverage in recent years. However, a close reading of the data suggests that dealer borrowing involving fixed-income securities has grown only modestly. Moreover, the increase that has occurred is not clearly associated with greater risk taking.Government securities ; Interest rates ; Risk

When the back office moved to the front burner: settlement fails in the treasury market after 9/11

Settlement fails, which occur when securities are not delivered and paid for on the date scheduled by the buyer and seller, can expose market participants to the risk of loss due to counterparty insolvency. This article examines the institutional and economic setting of the fails problem that affected the Treasury market following September 11 and describes how the Federal Reserve and the U.S. Treasury responded. The authors explain that fails rose initially because of the physical destruction of trade records and communication facilities. Fails remained high because a relatively low federal funds rate and investor reluctance to lend securities kept the cost of borrowing securities to avert or remedy a fail comparable to the cost of continuing to fail. The fails problem was ultimately resolved when the Treasury increased the outstanding supply of the on-the-run ten-year note through an unprecedented "snap" reopening. The article also suggests other ways to alleviate chronic fails, such as the introduction of a securities lending facility run by the Treasury and the institution of a penalty fee for fails.Treasury bills ; Government securities ; War - Economic aspects

Repurchase agreements with negative interest rates

Contrary to popular belief, interest rates can drop below zero. From early August to mid-November of 2003, negative rates occurred on certain U.S. Treasury security repurchase agreements. An examination of the market conditions behind this development reveals why market participants are sometimes willing to pay interest on money lent.Repurchase agreements ; Interest rates ; Treasury notes

Explaining settlement fails

The Federal Reserve now makes available current and historical data on trades in U.S. Treasury and other securities that fail to settle as scheduled. An analysis of the data reveals substantial variation in the frequency of fails over the 1990-2004 period. It also suggests that surges in fails sometimes result from operational disruptions, but often reflect market participants' insufficient incentive to avoid failing.Government securities ; Electronic trading of securities

Repo Market Microstructure in Unusual Monetary Policy Conditions

The financial turmoil that began in mid-2007 produced severe stress in interbank markets and prompted significant changes in central banks’ funding operations. We examine the changing characteristics of ECB official interventions through the crisis and assess how they affected the efficiency and reliability of the secondary repo market as a mechanism for the distribution of interbank funding. The limit orderbook from the BrokerTec electronic repo trading platform is reconstructed to provide a range of indicators of participating banks’ aversion to the risk of failing to fund their liquidity needs. These indicators anticipate similar variables from ECB reverse repo auctions and are also affected by surprise outcomes of auctions.Repo, Financial crisis, liquidity, market microstructure, monetary policy operations