What Drives U.S. Treasury Re-Use?
54 Pages Posted: 14 Jun 2021 Last revised: 30 Jun 2021
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Treasury Re-use and the Demand for Safe Assets
Date Written: December, 2020
Abstract
We study what drives the re-use of U.S. Treasury securities in the financial system. Using confidential supervisory data, we estimate the degree of collateral re-use at the dealer level through their collateral multiplier : the ratio between a dealer's total secured funding and their outright holdings financed through secured funding. We find that Treasury re-use increases as the supply of available securities decreases, especially when supply declines due to Federal Reserve asset purchases. We also find that non-U.S. dealers' re-use increases when profits from intermediating cash are high, U.S. dealers' re-use increases when demand to source on-the-run Treasuries is high, and both types of dealers' re-use can alleviate safe asset scarcity. Finally, we document a sharp drop in Treasury re-use at the onset of the COVID-19 pandemic, with a subsequent reversal after the Federal Reserve's intervention to support market functioning.
Keywords: re-use, dealer, Treasury, collateral, rehypothecation, safe assets
JEL Classification: E41, E51, E58, E63, G12, G24
Suggested Citation: Suggested Citation