QE Auctions of Treasury Bonds

55 Pages Posted: 30 Jul 2014

See all articles by Zhaogang Song

Zhaogang Song

Johns Hopkins University - Carey Business School

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

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Date Written: June 16, 2014

Abstract

The Federal Reserve (Fed) uses a unique auction mechanism to purchase U.S. Treasury securities in implementing its quantitative easing (QE) policy. In this paper, we study the outcomes of QE auctions and participating dealers' bidding behaviors from November 2010 to September 2011, during which the Fed purchased $780 billion Treasury securities. Our data include the transaction prices and quantities of each traded bond in each auction, as well as dealers' identities. We find that: (1) In QE auctions the Fed tends to exclude bonds that are liquid and on special, but among included bonds, purchase volumes gravitate toward more liquid bonds; (2) The auction costs are low on average: the Fed pays around 0.7 cents per $100 par value above the secondary market ask price on auction dates; (3) The heterogeneity of Fed's costs across bonds relates to their liquidity and specialness, suggesting that dealers respond to both valuation and information uncertainties; (4) Dealers exhibit st rong heterogeneity in their participation, trading volumes, and profits in QE auctions; (5) Auction bidding variables forecast bond returns only one day after the auction, suggesting that dealers have price-relevant information but the information decays quickly.

Keywords: auction, quantitative easing, Federal Reserve, treasury bond, specialness

JEL Classification: G12, G13

Suggested Citation

Song, Zhaogang and Zhu, Haoxiang, QE Auctions of Treasury Bonds (June 16, 2014). FEDS Working Paper No. 2014-48. Available at SSRN: https://ssrn.com/abstract=2473072 or http://dx.doi.org/10.2139/ssrn.2473072

Zhaogang Song (Contact Author)

Johns Hopkins University - Carey Business School ( email )

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Baltimore, MD 21202
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Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~zhuh

National Bureau of Economic Research (NBER) ( email )

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