The Scarcity Value of Treasury Collateral: Repo Market Effects of Security-Specific Supply and Demand Factors
50 Pages Posted: 30 Aug 2014 Last revised: 7 May 2015
Date Written: May 5, 2015
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, supply-demand factors, liquidity, Large Scale Asset Purchase programs, Treasury auctions
JEL Classification: G1, G12, G19, G23, E43
Suggested Citation: Suggested Citation