Intermediary Balance Sheets and the Treasury Yield Curve

123 Pages Posted: 7 Jul 2022 Last revised: 7 Sep 2023

See all articles by Wenxin Du

Wenxin Du

University of Chicago Booth School of Business

Benjamin Hebert

Stanford University

Wenhao Li

University of Southern California - Marshall School of Business

Multiple version iconThere are 4 versions of this paper

Date Written: September 6, 2023

Abstract

We document a regime change in the Treasury market post-Global Financial Crisis (GFC): dealers switched from net short to net long Treasury bonds. We construct "net-long" and "net-short" curves that account for balance sheet and financing costs, and show that actual yields moved from the net short curve pre-GFC to the net long curve post-GFC. Our theory shows the regime shift caused negative swap spreads and co-movement among swap spreads, dealer positions, and covered-interest-parity violations. Furthermore, the effects of various monetary and regulatory policies are regime-dependent. We highlight Treasury supply as a plausible driver of this regime shift.

Keywords: negative swap spread, covered interest rate parity deviations, Treasury yield curve

JEL Classification: G12, E52, F3

Suggested Citation

Du, Wenxin and Hebert, Benjamin M. and Li, Wenhao, Intermediary Balance Sheets and the Treasury Yield Curve (September 6, 2023). USC Marshall School of Business Research Paper , Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=4150025 or http://dx.doi.org/10.2139/ssrn.4150025

Wenxin Du

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://https://sites.google.com/site/wenxindu/

Benjamin M. Hebert

Stanford University ( email )

Stanford, CA 94305
United States

Wenhao Li (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

HOME PAGE: http://www.wenhao-li.com

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