Journal of Financial Economics Vol. 150 No. 3 2023
Intermediary balance sheets and the treasury yield curve
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.
- DOI
- 10.1016/j.jfineco.2023.103722
- Volume
- 150
- Issue
- 3
- Pages
- 103722
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref