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Tobias Adrian, Michael Fleming, Jonathan Goldberg, Morgan Lewis, Fabio Natalucci, and Jason Wu
Long-term interest rates hit record-low levels in 2012 but have since increased substantially. As discussed in an earlier post, the sharpest increase occurred between May 2 and July 5 of this year, with the ten-year Treasury yield rising from 1.63 percent to 2.74 percent. During the May-July episode, market liquidity also deteriorated. Some market participants have suggested that constraints on dealer balance sheet capacity impaired liquidity during the selloff, amplifying the magnitude and speed of the rise in interest rates and volatility. In this post, we review the evolution of Treasury market liquidity, evaluate whether dealer balance sheet capacity amplified the selloff, and examine what motivated dealer behavior during the episode.
On December 12, 2012, primary government securities dealers bought just 33 percent of the new ten-year Treasury notes sold at auction. This was one of the lowest shares on record and far below the 68 percent average for ten-year notes reported in this 2007 study by Fleming. In this post, we examine recent data on the buyers of Treasury securities at auction to understand whether the December 12 results are part of a trend and, if so, what explains it.
Liberty Street Economics features insight and analysis from economists working at the intersection of research and policy. The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Donald Morgan.
The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
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