Intermediary Balance Sheets and the Treasury Yield Curve

123 Pages Posted: 11 Jul 2022 Last revised: 6 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 1, 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: yield curve, balance sheet constraints, CIP deviations

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 1, 2023). FRB of New York Staff Report No. 1023, Available at SSRN: https://ssrn.com/abstract=4160077 or http://dx.doi.org/10.2139/ssrn.4160077

Wenxin Du (Contact Author)

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

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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