Intermediary Balance Sheets and the Treasury Yield Curve

64 Pages Posted: 11 Jul 2022 Last revised: 31 Jan 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: July 2022

Abstract

We document a regime change in the U.S. Treasury market post-Global Financial Crisis (GFC): dealers switched from net short to net long Treasury bonds. Consistent with this change, we derive “net-long” and “net-short” Treasury curves that account for dealers’ balance sheet costs, and show that actual Treasury yields moved from the net short curve pre-GFC to the net long curve post-GFC. This regime change helps explain negative swap spreads post- GFC and the co-movement among swap spreads, dealer Treasury positions, yield curve slope, and covered-interest-parity violations, and implies changing effects for a wide range of monetary and regulatory policy interventions.

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Suggested Citation

Du, Wenxin and Hebert, Benjamin M. and Li, Wenhao, Intermediary Balance Sheets and the Treasury Yield Curve (July 2022). NBER Working Paper No. w30222, Available at SSRN: https://ssrn.com/abstract=4159135 or http://dx.doi.org/10.2139/ssrn.4159135

Wenxin Du (Contact Author)

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
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HOME PAGE: http://https://sites.google.com/site/wenxindu/

Benjamin M. Hebert

Stanford University ( email )

Stanford, CA 94305
United States

Wenhao Li

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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