Public debt management announcements under “beat-the-market” opportunities

66 Pages Posted: 24 Jun 2022

See all articles by Enzo Rossi

Enzo Rossi

Swiss National Bank; University of Zurich

Alexander Dentler

affiliation not provided to SSRN

Date Written: June 22, 2022

Abstract

Public debt managers auction bonds to primary dealers (PDs) who may sell them to traders in the secondary market. PDs may have an information advantage about the bond’s value. When the resulting adverse selection problem is severe, the result is a separating equilibrium in which the secondary market breaks down whenever the true bond value is high. In a pooling equilibrium, on the other hand, the purchasing offers made by traders allow PDs to extract information rents. These rents give rise to two counteracting effects. First, they create an auction premium which incentivizes the debt manager to over-issue whenever the bond value is low. This is what we call “beat-the-market” opportunities. Data for U.S. Treasury auctions show a positive relationship between the auction premium and the issuance bias. Second, the information rents motivate traders to learn the bond value. This expertise mitigates the auction premium and the issuance bias. Announcing a target debt level commits the debt manager, limits information rent, and crowds out expertise.

Keywords: public debt management, announcements, sovereign debt markets, treasury auctions, state-inconsistent policy

JEL Classification: D44, H63, D82, D83

Suggested Citation

Rossi, Enzo and Dentler, Alexander, Public debt management announcements under “beat-the-market” opportunities (June 22, 2022). Swiss National Bank Working Paper No. 06/22, Available at SSRN: https://ssrn.com/abstract=4143519 or http://dx.doi.org/10.2139/ssrn.4143519

Enzo Rossi (Contact Author)

Swiss National Bank ( email )

Research
Fraumuensterstr. 8
Zuerich, 8022
Switzerland

University of Zurich ( email )

Zürich
Switzerland

Alexander Dentler

affiliation not provided to SSRN

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