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Who makes on-the-run Treasuries special?

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Author Info

  • Graveline, Jeremy J.
  • McBrady, Matthew R.
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    Abstract

    The most recently issued, on-the-run, Treasuries are extremely liquid and frequently trade at a premium in both the cash and repo, or financing, markets. Previous research suggests that both the cash and repo premiums reflect demand from buy-and-hold investors who value the superior liquidity of these securities and are reluctant to lend them in the repo market. We find evidence that premiums in the repo market are also closely related to market participants' demand to hedge interest rate risk associated with their holdings of fixed income securities.

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    File URL: http://www.sciencedirect.com/science/article/pii/S1042957311000155
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Intermediation.

    Volume (Year): 20 (2011)
    Issue (Month): 4 (October)
    Pages: 620-632

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    Handle: RePEc:eee:jfinin:v:20:y:2011:i:4:p:620-632

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    Web page: http://www.elsevier.com/locate/inca/622875

    Related research

    Keywords: On-the-run Treasuries Short-selling Liquidity Repo specials Repurchase agreements;

    References

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    1. Michael J. Fleming, 2001. "Measuring treasury market liquidity," Staff Reports 133, Federal Reserve Bank of New York.
    2. Jegadeesh, Narasimhan, 1993. " Treasury Auction Bids and the Salomon Squeeze," Journal of Finance, American Finance Association, vol. 48(4), pages 1403-19, September.
    3. Jordan, Bradford D & Jordan, Susan D, 1997. " Special Repo Rates: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 52(5), pages 2051-72, December.
    4. Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2006. "Valuation in Over-the-Counter Markets," NBER Working Papers 12020, National Bureau of Economic Research, Inc.
    5. Pierre-Olivier Weill & Dimitri Vayanos, 2007. "A Search-Based Theory of the On-the-Run Phenomenon," FMG Discussion Papers dp577, Financial Markets Group.
    6. Cohen, Lauren & Diether, Karl B. & Malloy, Christopher J., 2005. "Supply and Demand Shifts in the Shorting Market," Working Paper Series 2005-8, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    7. Julia Fernald & Patricia C. Mosser & Frank Keane, 1994. "Mortgage security hedging and the yield curve," Research Paper 9411, Federal Reserve Bank of New York.
    8. Julia Fernald & Patricia C. Mosser & Frank Keane, 1994. "Mortgage security hedging and the yield curve," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 92-100.
    9. Francis A. Longstaff, 2002. "The Flight-to-Liquidity Premium in U.S. Treasury Bond Prices," NBER Working Papers 9312, National Bureau of Economic Research, Inc.
    10. McBrady, Matthew R. & Schill, Michael J., 2007. "Foreign currency-denominated borrowing in the absence of operating incentives," Journal of Financial Economics, Elsevier, vol. 86(1), pages 145-177, October.
    11. Frank Keane, 1996. "Repo rate patterns for new Treasury notes," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 2(Sep).
    12. Buraschi, Andrea & Menini, Davide, 2002. "Liquidity risk and specialness," Journal of Financial Economics, Elsevier, vol. 64(2), pages 243-284, May.
    13. John Kambhu & Patricia C. Mosser, 2001. "The effect of interest rate options hedging on term-structure dynamics," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 51-70.
    14. S. Illeris & G. Akehurst, 2002. "Introduction," The Service Industries Journal, Taylor & Francis Journals, vol. 22(1), pages 1-3, January.
    15. Duffie, Darrell, 1996. " Special Repo Rates," Journal of Finance, American Finance Association, vol. 51(2), pages 493-526, June.
    16. Mark Fisher, 2002. "Special repo rates: an introduction," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 27-43.
    17. Amihud, Yakov & Mendelson, Haim, 1991. " Liquidity, Maturity, and the Yields on U.S. Treasury Securities," Journal of Finance, American Finance Association, vol. 46(4), pages 1411-25, September.
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    Cited by:
    1. D'Amico, Stefania & Fan, Roger & Kitzul, Yuriy, 2013. "The Scarcity Value of Treasury Collateral: Repo Market Effects of Security-Specific Supply and Demand Factors," Working Paper Series WP-2013-22, Federal Reserve Bank of Chicago.

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