Intermediary Balance Sheets and the Treasury Yield Curve

106 Pages Posted: 7 Jul 2022 Last revised: 25 Jul 2022

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 3 versions of this paper

Date Written: July 22, 2022

Abstract

We document regime change in the U.S. Treasury market post-Global Financial Crisis (GFC): dealers switched from a net short to a net long position in the Treasury market. We first derive bounds on Treasury yields that account for dealer balance sheet costs, which we call the net short and net long curves. We show that actual Treasury yields moved from the net short curve pre-GFC to the net long curve post-GFC, consistent with the shift in the dealers' net position. We then use a stylized model to demonstrate that increased bond supply and tightening leverage constraints can explain this change in regime. This regime change in turn helps explain negative swap spreads and the co-movement between swap spreads, dealer positions, yield curve slope, and covered-interest-parity violations, and implies changing effects for a wide range of monetary policy and regulatory policy interventions.

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 (July 22, 2022). USC Marshall School of Business Research Paper , 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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