Flow and Stock Effects of Large-Scale Treasury Purchases
39 Pages Posted: 4 Nov 2010 Last revised: 20 Nov 2012
Date Written: February 28, 2012
The Federal Reserve’s 2009 program to purchase $300 billion of U.S. Treasury securities represented an unprecedented intervention in the Treasury market and provides a natural experiment with the potential to shed light on the price elasticities of Treasuries and theories of supply effects in the term structure. Using security-level data on Treasury prices and quantities during the course of this program, we document a ‘local supply’ effect in the yield curve — yields within a particular maturity sector responded more to changes in the amounts outstanding in that sector than to similar changes in other sectors. We find that this phenomenon was responsible for a persistent downward shift in yields averaging about 30 basis points over the course of the program (the “stock effect”). In addition, except at very long maturities, purchase operations caused an average decline in yields in the sector purchased of 3.5 basis points on the days when those operations occurred (the “flow effect”). The sensitivity of our results to security characteristics generally supports a view of segmentation or imperfect substitution within the Treasury market during this time.
Keywords: Treasury Market, LSAP, Yield Curve, Preferred Habitat, Limits of Arbitrage
JEL Classification: E43, E5, E6, G1
Suggested Citation: Suggested Citation