The Cherry-Picking Option in the U.S. Treasury Buyback Auctions
AbstractWe study an important recent series of buyback auctions conducted by the U.S. Treasury in retiring $67.5 billion of its debt. We find that the Treasury was successful in buying back large amounts of illiquid debt while suffering only a small volatility-related market-impact cost. 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 thin by including multiple bonds in a buyback auction. We find evidence that the Treasury may have attempted to minimize its interest expense rather than its buyback costs in these auctions. There is no evidence, however, that the Treasury used its timing option to exploit auction participants.
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Bibliographic InfoPaper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2004-23.
Date of creation: Sep 2005
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