Treasury inconvenience yields during the COVID-19 crisis

By Zhiguo He, Stefan Nagel, Zhaogang Song. Journal of Financial Economics, 2020

205 citations recorded by the source corpus.

In sharp contrast to most previous crisis episodes, the Treasury market experienced severe stress and illiquidity during the COVID-19 crisis, raising concerns that the safe-haven status of US Treasuries may be eroding. We document large shifts in Treasury ownership and temporary accumulation of Treasury and reverse repo positions on dealer balance sheets during this period. We build a dynamic equilibrium asset pricing model in which dealers subject to regulatory balance sheet constraints intermediate demand/supply shocks from habitat agents and provide repo financing to levered investors. The model predicts that Treasury inconvenience yields, measured as the spread between Treasuries and overnight-index swap rates (OIS), as well as spreads between dealers’ reverse repo and repo rates, should be highly positive during the COVID-19 crisis, as is confirmed in the data. The same model framework, adapted to the institutional setting in 2007–2009, can also explain the negative Treasury-OIS spread observed during the Great Recession.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/4bc51ede8c622b2b877a96e5bb3c7e56229c7247

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1. Nina Boyarchenko
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Citations in the corpus

• It’s What You Say and What You Buy: A Holistic Evaluation of the Corporate Credit Facilities (2020, background): “the index-to-CDS basis, which is argued by Junge and Trolle (2015) to be a measure of overall liquidity of the CDS market, as the difference between the index spread and the intrinsic value implied by the spreads of its constituents.”
• When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response (2020, unknown): “Duffie (2020), Fleming and Ruela (2020), He, Nagel, and Song (2020), and Schrimpf, Shin, and Sushko (2020) highlight issues in the Treasury market.”
• Can the Covid Bailouts Save the Economy? (2020, unknown): “…large bailouts which need to be absorbed by savers, (ii) increased credit risk of the U.S. government, and (iii) distressed selling of safe assets to meet margin calls in other parts of investors’ portfolios and regulatory constraints preventing others from stepping in (He, Nagel, and Song, 2020).”
• In sickness and in debt: The COVID-19 impact on sovereign credit risk (2020, unknown): “We use the returns on the S&P 500 stock market index, the CBOE VIX volatility index, the U.S. (Treasury–LIBOR) TED spread, investment grade (subinvestment grade) credit spreads [defined as the difference between the corporate U.S. BBB (BB) and AAA (BBB) yields], and the Dollar factor, measured as th”