ABSTRACT We study an important recent series of buyback auctions conducted by the U.S. Treasury in retiring $67.5 billion of its illiquid off‐the‐run debt. The Treasury was successful in buying back large amounts of illiquid debt while suffering only a small market‐impact cost. The Treasury included the most‐illiquid bonds more frequently in the auctions, but tended to buy back the least‐illiquid of these bonds. Although the Treasury had the option to cherry pick from among the bonds offered, we find that the Treasury was actually penalized for being spread too thinly in the buybacks.

Abstract This paper examines intra-day trading data from the inter-dealer broker market for U.S. Treasury securities and measures the degree of price pressure in the off-the-run Treasury market. As is well known, securities that would appear to be very close substitutes, i.e., on-the-run and off-the-run Treasury bonds, behave as if there is some degree of market segmentation. This is the first systematic study of the off-the-run Treasury note and bond market focused entirely on a price pressure effect using intra-day data. The paper analyzes price pressure through matched pairs of securities that differ only in liquidity.