How Do Treasury Dealers Manage Their Positions?

78 Pages Posted: 13 Sep 2007 Last revised: 19 Dec 2023

See all articles by Michael J. Fleming

Michael J. Fleming

Federal Reserve Bank of New York

Giang Nguyen

Pennsylvania State University - Smeal College of Business

Joshua V. Rosenberg

Independent

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2008

Abstract

Using thirty-one years of data (1990–2020) on U.S. Treasury dealer positions, we find that Treasury issuance is the main driver of dealers’ weekly inventory changes. Such inventory fluctuations are only partially offset in adjacent weeks and not significantly hedged with futures. Dealers are compensated for inventory risk by means of subsequent price appreciation of their holdings. Amid increased balance sheet costs attributable to post-crisis regulatory changes, dealers significantly reduce their position taking and lay off inventory faster. Moreover, the increased participation of nondealers (investment funds) in the primary market contributes to diminishing compensation for inventory risk taken on at auctions.

Keywords: Treasury market, dealer, positions, inventory, hedging, issuance

JEL Classification: G12, G20, G24

Suggested Citation

Fleming, Michael J. and Nguyen, Giang and Rosenberg, Joshua V., How Do Treasury Dealers Manage Their Positions? (March 1, 2008). FRB of New York Staff Report No. 299, Rev. December 2023, Available at SSRN: https://ssrn.com/abstract=1012684 or http://dx.doi.org/10.2139/ssrn.1012684

Michael J. Fleming (Contact Author)

Federal Reserve Bank of New York ( email )

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New York, NY 10045
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HOME PAGE: http://www.newyorkfed.org/research/economists/fleming/

Giang Nguyen

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States

HOME PAGE: http://directory.smeal.psu.edu/gxn13

Joshua V. Rosenberg

Independent ( email )

United States