How Do Treasury Dealers Manage Their Positions?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractUsing data on U.S. Treasury dealer positions from 1990 to 2006, we find evidence of a significant role for dealers in the intertemporal intermediation of new Treasury security supply. Dealers regularly take into inventory a large share of Treasury issuance so that dealer positions increase during auction weeks. These inventory increases are only partially offset in adjacent weeks and are not significantly hedged with futures. Dealers seem to be compensated for the risk associated with these inventory changes by means of price appreciation in the subsequent week.

Presidential Address: Asset Price Dynamics with Slow‐Moving Capital

“…As suggested by my simple general equilibrium model, the price of the note goes down as the date of the anticipated new supply approaches, and then recovers in subsequent days. Indeed, Fleming and Rosenberg (2007) show that Treasury dealers adjust their positions to absorb issuance supply shocks. They describe how “dealers seem to be compensated for the risks associated with these inventory changes via price appreciation the subsequent week.”…”

Explaining repo specialness

“…In advance of a reopening auction, primary dealers with limited risk‐bearing capacity (Fleming & Rosenberg, ) hedge the risk of the winner's curse (being allocated too many bonds at a low yield) by short‐selling the already‐issued bond . To do so, they enter into a special reverse repo.…”

“…The dealers' limited risk‐bearing capacity relates to the fact that primary dealers are risk averse or have costly capital, so they need to be compensated for the large position in the asset and the price risk they take on their inventory in the auction. This compensation comes in the form of higher auction yields from which the dealers generate trading profits (see also Fleming & Rosenberg, ). If the dealers' risk aversion or the price risk is larger, one may expect them to charge a higher yield at the auction.…”

Non‐residents’ Holdings, Market Volatility and Public Debt Sustainability. An Analysis with Data for Italy

“…10‐year maturity) may proxy only the current cost to issue a bond with the same maturity and not the current overall cost to issue new debt comprised of bonds with different maturities. Moreover, as Goldreich () and Lou et al () have explained, market yields differ from the result of contemporaneous auctions (the main allotment method used in advanced economies); underpricing at the auctions is usually found in different countries (Fleming and Rosenberg, ). Consequently, to account for the marginal cost of the debt stock as accurately as possible, we construct a monthly time series from the results of GB auctions.…”