The US Government Bond Liquidity during the COVID-19 Pandemic

Abstract

I study the dynamics and sources of the US government bond liquidity disruptions during the COVID-19 pandemic and whether the Federal Reserve interventions had been effective in supporting the market functioning during the period. Many Treasuries illiquidity measures surpassed the Great Recession levels in March 2020. Illiquidity spikes do not seem to match with proposed explanatory events. It took the Federal Reserve two weeks to normalize the nominal bonds liquidity. However, the Federal Reserve interventions had almost no effect on the illiquidity spike in inflation-linked bonds, which, while milder, turned out to be much more persistent than in nominal Treasuries.

Keywords: liquidity, Treasuries, inflation-linked bonds, COVID-19

JEL Classification: G12, G14, G18, G28, H12, H63, H84