Working Paper: NBER ID: w30222
Authors: Wenxin Du; Benjamin M. Hbert; Wenhao Li
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 “netshort” 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: No keywords provided
JEL Codes: F3; G12; G15; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regime shift in the treasury market post-GFC (E63) | significant change in the swap spread (E43) |
| dealers transitioned from net short to net long positions (L14) | swap spread went from positive to negative (F31) |
| regime shift (P39) | negative swap spreads (G12) |
| regime shift (P39) | comovement among swap spreads, dealer positions, and CIP violations (G18) |
| balance sheet costs associated with dealer positions (G32) | primary driver of regime shift (P39) |
| higher balance sheet costs (G32) | higher treasury yields relative to swap rates in the long regime (E43) |
| higher balance sheet costs (G32) | lower treasury yields in the short regime (E43) |
| various monetary and regulatory policies (E63) | regime-dependent effects (E65) |
| increase in treasury supply (H63) | corresponding increase in dealers' net long positions (G19) |
| change in the sign of dealer positions (C78) | sign changes in swap spreads (E43) |