Treasury inconvenience yields during the COVID-19 crisisZhiguo He (), Stefan Nagel and Zhaogang Song Journal of Financial Economics, 2022, vol. 143, issue 1, 57-79 Abstract: 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. Keywords: Habitat agents; Primary dealers; Repo; Safe asset; Treasury yield (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:143:y:2022:i:1:p:57-79 DOI: 10.1016/j.jfineco.2021.05.044 Access Statistics for this article Journal of Financial Economics is currently edited by G. William Schwert More articles in Journal of Financial Economics from Elsevier |
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