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

See all articles by Stefania D'Amico

Stefania D'Amico

Federal Reserve Bank of Chicago

Roger Fan

Federal Reserve Bank of Chicago

Yuriy Kitsul

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: May 5, 2015

Abstract

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

D'Amico, Stefania and Fan, Roger and Kitsul, Yuriy, The Scarcity Value of Treasury Collateral: Repo Market Effects of Security-Specific Supply and Demand Factors (May 5, 2015). FEDS Working Paper. Available at SSRN: https://ssrn.com/abstract=2489108 or http://dx.doi.org/10.2139/ssrn.2489108

Stefania D'Amico

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Roger Fan

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Yuriy Kitsul (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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