The Decline in Idiosyncratic Values of US Treasury Securities
21 Pages Posted: 24 Aug 2019 Last revised: 3 Aug 2021
Date Written: August 23, 2019
Abstract
Unique features and market frictions can lead to idiosyncratic pricing for some US Treasury securities. This study uses a linear programming (LP) model to measure aggregate idiosyncratic pricing of T-notes and T-bonds from 1980 to 2016. We document an average idiosyncratic pricing of $0.11 per $100 par, as compared to an average bid-ask spread of $0.08. Further, idiosyncratic pricing declined dramatically from the early 1980s to the 2010s. Empirical evidence suggests that the 1986 Tax Reform Act, increasing issue sizes and improving market liquidity contribute to the decline. At the individual security level, we identify factors contributing to and mitigating idiosyncratic pricing.
Keywords: US Treasuries, Arbitrage, Bond Liquidity
JEL Classification: G12, G14
Suggested Citation: Suggested Citation