The Scarcity Value of Treasury Collateral: Repo Market Effects of Security-Specific Supply and Demand Factors
52 Pages Posted: 8 Dec 2013 Last revised: 1 Nov 2014
Date Written: May 29, 2014
In the special collateral repo market, forward agreements are security-specific, which may magnify demand and supply effects. We quantify the scarcity value of Treasury collateral by estimating the impact of security-specific demand and supply factors on the repo rates of all outstanding U.S. Treasury securities. We find an economically and statistically significant scarcity premium. This scarcity effect is quite persistent, passes through to Treasury market prices, and explains a significant portion of the flow-effects of LSAP programs, providing additional evidence for the scarcity channel of QE. Through the same mechanism, the Fed's reverse repo operations could alleviate potential shortages of high-quality collateral.
Keywords: Treasury bonds, Repo contracts, Special repo rate, Supply-demand factors, Liquidity, Large Scale Asset Purchase programs, Treasury auctions
JEL Classification: G1, G12, G19, C23, E43
Suggested Citation: Suggested Citation