QE Auctions of Treasury Bonds

49 Pages Posted: 31 Mar 2016 Last revised: 9 Mar 2017

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)

Multiple version iconThere are 2 versions of this paper

Date Written: March 7, 2017

Abstract

The Federal Reserve uses (reverse) auctions to implement its purchases of Treasury bonds in quantitative easing. To evaluate dealers' offers across multiple bonds, the Fed relies on its internal yield-curve model, fitted to secondary market bond prices. From November 2010 to September 2011, a one-standard-deviation increase in the "cheapness" of a Treasury bond--how much the market price of the bond is below a model-implied value--increases the Fed's purchase quantity of that bond by 276 million and increases the auction costs on that bond by 2.6 cents per $100 par value, controlling for standard covariates. Our results suggest that the Fed harvests gains from trades by purchasing "undervalued" bonds, but strategic dealers extract some profits because the Fed's relative values can be partly inferred from price data.

Keywords: Auction, Federal Reserve, Quantitative Easing, Treasury Bond

JEL Classification: G12, G13

Suggested Citation

Song, Zhaogang and Zhu, Haoxiang, QE Auctions of Treasury Bonds (March 7, 2017). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2756674 or http://dx.doi.org/10.2139/ssrn.2756674

Zhaogang Song (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Haoxiang Zhu

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

100 Main Street E62-623
Cambridge, MA 02142
United States

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

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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