The Determinants of Treasury Bond Stripping Level

Abstract

Several explanations of Treasury bond stripping have been proposed including interest rate risk management, taxes, and market completion. Our findings suggest that stripping is affected by each of these factors. First, we find that higher coupon and longer maturity Treasury bonds are more heavily stripped, consistent with the Interest Rate Risk and Tax hypotheses. Second, large gaps in the maturity spectrum of Treasury bonds induce stripping, in support of the Market Completion hypothesis. Third, the percent of individual bonds held as strips decreases when the yield curve is significantly inverted, consistent with the Tax hypothesis. Finally, patterns of coupon rates on adjacent maturity issues of Treasuries also have an impact on Treasury bond stripping.