Authors: Wenxin Du, Benjamin Hébert, and Wenhao Li
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Staff Reports
Intermediary Balance Sheets and the Treasury Yield Curve
Number 1023
July 2022
July 2022
JEL classification: G12, E52, F3
We have documented a regime change in the U.S. Treasury market post-Global Financial Crisis (GFC). We first derived bounds on Treasury yields that account for dealer balance sheet costs, which we call the net short and net long curves. We show that actual Treasury yields moved from the net short curve pre- GFC to the net long curve post-GFC, consistent with the shift in the dealers’ net position. We then use a stylized model to demonstrate that increased bond supply and tightening leverage constraints can explain this change in regime. This change, in turn, helps explain negative swap spreads and the co-movement between swap spreads, dealer positions, yield curve slope, and covered-interest-parity violations, and implies changing effects for a wide range of monetary and regulatory policy interventions.
AUTHOR DISCLOSURE STATEMENT(S)
Wenxin Du
The author has nothing to declare.
Benjamin Hébert
The author has nothing to declare.
Wenhao Li
The author has nothing to declare.
The author has nothing to declare.
Benjamin Hébert
The author has nothing to declare.
Wenhao Li
The author has nothing to declare.
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