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How do treasury dealers manage their positions?

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Abstract

Using thirty-one years of data (1990–2020) on U.S. Treasury dealer positions, we find that Treasury issuance is the main driver of dealers’ weekly inventory changes. Such inventory fluctuations are only partially offset in adjacent weeks and not significantly hedged with futures. Dealers are compensated for inventory risk by means of subsequent price appreciation of their holdings. Amid increased balance sheet costs attributable to post-crisis regulatory changes, dealers significantly reduce their position taking and lay off inventory faster. Moreover, the increased participation of nondealers (investment funds) in the primary market contributes to diminishing compensation for inventory risk taken on at auctions.

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  • Michael J. Fleming & Giang Nguyen & Joshua V. Rosenberg, 2007. "How do treasury dealers manage their positions?," Staff Reports 299, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:299
    Note: Revised March 2024.
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    Cited by:

    1. Stefania D'Amico & Roger Fan & Yuriy Kitsul, 2013. "The Scarcity Value of Treasury Collateral: Repo Market Effects of Security-Specific Supply and Demand Factors," Working Paper Series WP-2013-22, Federal Reserve Bank of Chicago.
    2. Chaboud, Alain P. & Chiquoine, Benjamin & Hjalmarsson, Erik & Loretan, Mico, 2010. "Frequency of observation and the estimation of integrated volatility in deep and liquid financial markets," Journal of Empirical Finance, Elsevier, vol. 17(2), pages 212-240, March.
    3. Klingler, Sven & Sundaresan, Suresh, 2023. "Diminishing treasury convenience premiums: Effects of dealers’ excess demand and balance sheet constraints," Journal of Monetary Economics, Elsevier, vol. 135(C), pages 55-69.
    4. Beetsma, Roel & Giuliodori, Massimo & de Jong, Frank & Widijanto, Daniel, 2016. "Price effects of sovereign debt auctions in the euro-zone: The role of the crisis," Journal of Financial Intermediation, Elsevier, vol. 25(C), pages 30-53.
    5. He, Zhiguo & Nagel, Stefan & Song, Zhaogang, 2022. "Treasury inconvenience yields during the COVID-19 crisis," Journal of Financial Economics, Elsevier, vol. 143(1), pages 57-79.
    6. Warren B. Hrunga & Jason S. Seligman, 2015. "Responses to the Financial Crisis, Treasury Debt, and the Impact on Short-Term Money Markets," International Journal of Central Banking, International Journal of Central Banking, vol. 11(1), pages 151-190, January.
    7. Francisco Alvarez & Cristina Mazon, 2019. "Overpricing in Spanish Treasury Auctions," Annals of Economics and Finance, Society for AEF, vol. 20(1), pages 199-220, May.
    8. Ferrara, Federico Maria, 2024. "Central bank asset purchases and auction cycles revisited: new evidence from the euro area," Working Paper Series 2927, European Central Bank.
    9. Dong Lou & Hongjun Yan & Jinfan Zhang, 2013. "Anticipated and Repeated Shocks in Liquid Markets," The Review of Financial Studies, Society for Financial Studies, vol. 26(8), pages 1891-1912.
    10. Beetsma, Roel & Giuliodori, Massimo & Hanson, Jesper & de Jong, Frank, 2020. "Determinants of the bid-to-cover ratio in Eurozone sovereign debt auctions," Journal of Empirical Finance, Elsevier, vol. 58(C), pages 96-120.
    11. Jennie Bai & Michael J. Fleming & Casidhe Horan, 2013. "The Microstructure of China's Government Bond Market," Staff Reports 622, Federal Reserve Bank of New York.
    12. J.J.M. Van Spronsen & R.M.W.J. Beetsma, 2022. "Unconventional Monetary Policy and Auction Cycles of Eurozone Sovereign Debt," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(1), pages 169-202, February.
    13. Cafiso, Gianluca, 2019. "Sovereign bond markets when auctions take place: Evidence from Italy," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 406-430.
    14. Smales, L.A., 2021. "Macroeconomic news and treasury futures return volatility: Do treasury auctions matter?," Global Finance Journal, Elsevier, vol. 48(C).

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    More about this item

    Keywords

    Treasury market; dealer; positions; inventory; hedging; issuance;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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