Bond Losses in Post-Auction Resale Markets: Causes and Consequences

This paper examines the primary-dealers’ returns in post-auction resale markets for treasury bonds, assesses the prevalence of losses and gains and their consequences for the financial sector. Using a novel database that tracks more than 2,350 primary-to-secondary transactions, we find
that bond losses for primary-dealers are pervasive and were severe during the financial crisis. Our results indicate that liquidity constraint is a major source of the observed losses. We also find that financial sector value is correlated with these losses. Using an alternating market
experiment, we show that primary-to-secondary losses are higher under discriminatory auctions as compared to uniform auctions.

Keywords: Bond Losses, Treasury Bonds, Financial Sector Value, Auction Mechanisms.

JEL Classification: C57, C58, D44, G1, G2

Suggested Citation: Suggested Citation

Barbosa, Klenio and De Silva, Dakshina G. and Yang, Liyu and Yoshimoto, Hisayuki, Bond Losses in Post-Auction Resale Markets: Causes and Consequences (September 14, 2022). Available at SSRN: https://ssrn.com/abstract=3512531 or http://dx.doi.org/10.2139/ssrn.3512531