Publication Type

Journal Article

Version

publishedVersion

Publication Date

1-2022

Abstract

In sharp contrast to most previous crisis episodes, the Treasury market experienced severe stress and illiquidity during the COVID-19 crisis, raising concerns that the safe-haven status of US Treasuries may be eroding. We document large shifts in Treasury ownership and temporary accumulation of Treasury and reverse repo positions on dealer balance sheets during this period. We build a dynamic equilibrium asset pricing model in which dealers subject to regulatory balance sheet constraints intermediate demand/supply shocks from habitat agents and provide repo financing to levered investors. The model predicts that Treasury inconvenience yields, measured as the spread between Treasuries and overnight-index swap rates (OIS), as well as spreads between dealers’ reverse repo and repo rates, should be highly positive during the COVID-19 crisis, as is confirmed in the data. The same model framework, adapted to the institutional setting in 2007–2009, can also explain the negative Treasury-OIS spread observed during the Great Recession.

Keywords

habitat agents, primary dealers, repo, safe asset, treasury yield

Discipline

Finance | Finance and Financial Management

Research Areas

Finance

Areas of Excellence

Growth in Asia

Publication

Journal of Financial Economics

Volume

143

Issue

1

First Page

57

Last Page

79

ISSN

0304-405X

Identifier

10.1016/j.jfineco.2021.05.044

Publisher

Elsevier

External URL

https://api.elsevier.com/content/abstract/scopus_id/85108517390

Additional URL

https://doi.org/10.1016/j.jfineco.2021.05.044

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