At the New York Fed, our mission is to make the U.S. economy stronger and the financial system more stable for all segments of society. We do this by executing monetary policy, providing financial services, supervising banks and conducting research and providing expertise on issues that impact the nation and communities we serve.
The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
The market for U.S. Treasury securities experienced extreme stress in March 2020, when prices dropped precipitously (yields spiked) over a period of about two weeks. This was highly unusual, as Treasury prices typically increase during times of stress. Using a theoretical model, we show that markets for safe assets can be fragile due to strategic interactions among investors who hold Treasury securities for their liquidity characteristics. Worried about having to sell at potentially worse prices in the future, such investors may sell preemptively, leading to self-fulfilling “market runs” that are similar to traditional bank runs in some respects.
Treasury yields have risen sharply in recent months. The yield on the most recently issued ten-year note, for example, rose from 1.73 percent on March 4 to 3.48 percent on June 14, reaching its highest level since April 2011. Increasing yields result in realized or mark-to-market losses for fixed-income investors. In this post, we put these losses in historical perspective and investigate whether longer-term yield changes are better explained by expectations of higher short-term rates or by investors demanding greater compensation for holding Treasury securities.
Jordan Barone, Alain Chaboud, Adam Copeland, Cullen Kavoussi, Frank Keane, and Seth Searls
The economic disruptions associated with the COVID-19 pandemic sparked a global dash-for-cash as investors sold securities rapidly. This selling pressure occurred across advanced sovereign bond markets and caused a deterioration in market functioning, leading to a number of central bank actions. In this post, we highlight results from a recent paper in which we show that these disruptions occurred disproportionately in the U.S. Treasury market and offer explanations for why investors’ selling pressures were more pronounced and broad-based in this market than in other sovereign bond markets.
Ricardo Correa, Linda S. Goldberg, Robert Lerman, and Bo Sun
The U.S. dollar has played a preeminent role in the global economy since the second World War. It is used as a reserve currency and the currency of denomination for a large fraction of global trade and financial transactions. The status of the U.S. dollar engenders important considerations for the effectiveness of U.S. policy instruments and the functioning of global financial markets. These considerations include understanding potential factors that may alter the dominance of the U.S. dollar in the future, such as changes in the macroeconomic and policy environments or the development of new technologies and payment systems.
Linda S. Goldberg, Robert Lerman, and Dan Reichgott
Will developments in technology, geopolitics, and the financial market reduce the dollar’s important roles in the global economy? This post updates prior commentary [here, here, and here], with insights about whether recent developments, such as the pandemic and the sanctions on Russia, might change the roles of the dollar. Our view is that the evidence so far points to the U.S. dollar maintaining its importance internationally. A companion post reports on the Inaugural Conference on the International Roles of the U.S. Dollar jointly organized by the Federal Reserve Board and Federal Reserve Bank of New York and held on June 16-17.
Nina Boyarchenko, Richard Crump, Anna Kovner, and Or Shachar
Corporate bonds are a key source of funding for U.S. non-financial corporations and a key investment security for insurance companies, pension funds, and mutual funds. Distress in the corporate bond market can thus both impair access to credit for corporate borrowers and reduce investment opportunities for key financial sub-sectors. In a February 2021 Liberty Street Economics post, we introduced a unified measure of corporate bond market distress, the Corporate Bond Market Distress Index (CMDI), then followed up in early June 2022 with a look at how corporate bond market functioning evolved over 2022 in the wake of the Russian invasion of Ukraine and the tightening of U.S. monetary policy. Today we are launching the CMDI as a regularly produced data series, with new readings to be published each month. In this post, we describe what constitutes corporate bond market distress, motivate the construction of the CMDI, and argue that secondary market measures alone are insufficient to capture market functioning.
Nina Boyarchenko, Richard Crump, Anna Kovner, and Or Shachar
The Russian invasion of Ukraine increased uncertainty around the world. Although most U.S. companies have limited direct exposure to Ukrainian and Russian trading partners, increased global uncertainty may still have an indirect effect on funding conditions through tightening financial conditions. In this post, we examine how conditions in the U.S. corporate bond market have evolved since the start of the year through the lens of the U.S. Corporate Bond Market Distress Index (CMDI). As described in a previousLiberty Street Economics post, the index quantifies joint dislocations in the primary and secondary corporate bond markets and can thus serve as an early warning signal to detect financial market dysfunction. The index has risen sharply from historically low levels before the invasion of Ukraine, peaking on March 19, but appears to have stabilized around the median historical level.
Viral V. Acharya, Ryan Banerjee, Matteo Crosignani, Tim Eisert, and Renée Spigt
Riskier firms typically borrow at higher rates than safer firms because investors require compensation for taking on more risk. However, since 2009 this relationship has been turned on its head in the massive BBB corporate bond market, with risky BBB-rated firms borrowing at lower rates than their safer BBB-rated peers. The resulting risk materialized in an unprecedented wave of “fallen angels” (or firms downgraded below the BBB investment-grade threshold) at the onset of the COVID-19 pandemic. In this post, based on a related Staff Report, we claim that this anomaly has been driven by a combination of factors: a boost in investor demand for investment-grade bonds associated with the Federal Reserve’s quantitative easing (QE) and sluggish adjustment of credit ratings for risky BBB issuers.
At the outbreak of the pandemic, in March 2020, the Federal Reserve implemented a suite of facilities, including two associated with international dollar liquidity—the central bank swap lines and the Foreign International Monetary Authorities (FIMA) repo facility—to provide dollar liquidity. This post discusses recent evidence showing the contributions of these facilities to financial and economic stability, highlighting evidence from recent research by Goldberg and Ravazzolo (December 2021).
On November 17, 2021, the New York Fed hosted the seventh annual Conference on the U.S. Treasury Market. The one-day event, held virtually, was co-sponsored by the U.S. Department of the Treasury, the Federal Reserve Board, the U.S. Securities and Exchange Commission (SEC), and the U.S. Commodity Futures Trading Commission (CFTC). The agenda featured one panel on the effects of sudden changes in investor positioning, and two panels discussing proposals to strengthen Treasury market resiliency and improve market intermediation from various public and private sector perspectives. Speeches touched on recommendations from a recent progress report by the Inter-Agency Working Group for Treasury Market Surveillance (IAWG), and efforts to improve market resilience by reforming market structure and regulation. Finally, a fireside chat discussed the importance of increasing diversity of experiences and perspectives within the public and private sectors.
Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.
The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Asani Sarkar, all economists in the Bank’s Research Group.
Liberty Street Economics does not publish new posts during the blackout periods surrounding Federal Open Market Committee meetings.
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.
Economic Research Tracker
Liberty Street Economics is now available on the iPhone® and iPad® and can be customized by economic research topic or economist.
This ongoing Liberty Street Economics series analyzes disparities in economic and policy outcomes by race, gender, age, region, income, and other factors.
We encourage your comments and queries on our posts and will publish them (below the post) subject to the following guidelines:
Please be brief: Comments are limited to 1500 characters.
Please be quick: Comments submitted after COB on Friday will not be published until Monday morning.
Please be aware: Comments submitted shortly before or during the FOMC blackout may not be published until after the blackout.
Please be on-topic and patient: Comments are moderated and will not appear until they have been reviewed to ensure that they are substantive and clearly related to the topic of the post. We reserve the right not to post any comment, and will not post comments that are abusive, harassing, obscene, or commercial in nature. No notice will be given regarding whether a submission will or will not be posted.
The LSE editors ask authors submitting a post to the blog to confirm that they have no conflicts of interest as defined by the American Economic Association in its Disclosure Policy. If an author has sources of financial support or other interests that could be perceived as influencing the research presented in the post, we disclose that fact in a statement prepared by the author and appended to the author information at the end of the post. If the author has no such interests to disclose, no statement is provided. Note, however, that we do indicate in all cases if a data vendor or other party has a right to review a post.