Bond Losses in Post-Auction Resale Markets: Causes and Consequences
62 Pages Posted: 17 Jan 2020 Last revised: 21 Sep 2023
Date Written: September 14, 2022
This paper examines the primary-dealers’ returns in post-auction resale markets for treasury bonds, assesses the prevalence of losses and gains and their consequences for the financial sector. Using a novel database that tracks more than 2,350 primary-to-secondary transactions, we find
that bond losses for primary-dealers are pervasive and were severe during the financial crisis. Our results indicate that liquidity constraint is a major source of the observed losses. We also find that financial sector value is correlated with these losses. Using an alternating market
experiment, we show that primary-to-secondary losses are higher under discriminatory auctions as compared to uniform auctions.
Keywords: Bond Losses, Treasury Bonds, Financial Sector Value, Auction Mechanisms.
JEL Classification: C57, C58, D44, G1, G2
Suggested Citation: Suggested Citation