Advanced Search
MyIDEAS: Login to save this paper or follow this series

Duration risk versus local supply channel in Treasury yields: evidence from the Federal Reserve's asset purchase announcements

Contents:

Author Info

  • Michael E. Cahill
  • Stefania D’Amico
  • Canlin Li
  • John S. Sears
Registered author(s):

    Abstract

    The FOMC's announcements of Treasury purchase programs and the subsequent or contemporaneous statements by the New York Fed about the programs' operational details provide a sequence of natural experiments with the potential to shed light on the relative importance of the duration risk channel versus the local supply channel for the transmission of supply effects to the term structure of interest rates. Using intraday security-level data on Treasury securities, we conduct five event studies to document the presence of local supply effects and duration risk effects. Further, using our new measures of local supply surprise and duration risk surprise we quantify the average impact of these two supply channels on nominal Treasury yields for each of the five events. Finally, we also try to determine how the importance of these factors has changed over time and relative to the first Large Scale Asset Purchase program in 2008-09. We find that: first, once the pre-announcement market expectations are carefully controlled for, the duration risk and local supply channels together are responsible for a decline in yields averaging about 9 basis points per $100 billion over the course of these announcements; second, these two channels are almost equally important for the transmission mechanism of purchases, as on average each of these channels accounts for about half of the yields decline; third, the efficacy of these two channels does not seem to have declined over time; and fourth, the purchase and sale price reactions to the announcements are quite similar, a result potentially relevant for the unwinding of these programs.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.federalreserve.gov/pubs/feds/2013/201335/201335abs.html
    Download Restriction: no

    File URL: http://www.federalreserve.gov/pubs/feds/2013/201335/201335pap.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2013-35.

    as in new window
    Length:
    Date of creation: 2013
    Date of revision:
    Handle: RePEc:fip:fedgfe:2013-35

    Contact details of provider:
    Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551
    Web page: http://www.federalreserve.gov/
    More information through EDIRC

    Order Information:
    Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html

    Related research

    Keywords:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Denis Gromb & Dimitri Vayanos, 2010. "Limits of Arbitrage: The State of the Theory," NBER Working Papers 15821, National Bureau of Economic Research, Inc.
    2. Michael W. Brandt & Kenneth A. Kavajecz, 2004. "Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve," Journal of Finance, American Finance Association, vol. 59(6), pages 2623-2654, December.
    3. Myron H. Ross, 1966. ""Operation Twist": A Mistaken Policy?," Journal of Political Economy, University of Chicago Press, vol. 74, pages 195.
    4. Andrés, Javier & López-Salido, J David & Nelson, Edward, 2004. "Tobin's Imperfect Asset Substitution in Optimizing General Equilibrium," CEPR Discussion Papers 4336, C.E.P.R. Discussion Papers.
    5. Michael D. Bauer & Glenn D. Rudebusch, 2011. "The signaling channel for Federal Reserve bond purchases," Working Paper Series 2011-21, Federal Reserve Bank of San Francisco.
    6. Olivier Vigneron, & Xavier Gabaix & Arvind Krishnamurthy, 2004. "Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market," Econometric Society 2004 North American Summer Meetings 430, Econometric Society.
    7. Greenwood, Robin & Vayanos, Dimitri, 2008. "Bond Supply and Excess Bond Returns," CEPR Discussion Papers 6694, C.E.P.R. Discussion Papers.
    8. Jean-Luc Vila & Dimitri Vayanos, 2009. "A Preferred-Habitat Model of the Term Structure of Interest Rates," FMG Discussion Papers dp641, Financial Markets Group.
    9. Eric T. Swanson, 2011. "Let’s twist again: a high-frequency event-study analysis of operation twist and its implications for QE2," Working Paper Series 2011-08, Federal Reserve Bank of San Francisco.
    10. Eric M. Engen & R. Glenn Hubbard, 2005. "Federal Government Debt and Interest Rates," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 83-160 National Bureau of Economic Research, Inc.
    11. Jack Meaning & Feng Zhu, 2011. "The impact of recent central bank asset purchase programmes," BIS Quarterly Review, Bank for International Settlements, December.
    12. Lars E. O. Svensson, 1994. "Estimating and Interpreting Forward Interest Rates," IMF Working Papers 94/114, International Monetary Fund.
    13. 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.
    14. Holland, Thomas E, 1969. "'Operation Twist' and the Movement of Interest Rates and Related Economic Time Series," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(3), pages 260-65, October.
    15. Lars E.O. Svensson, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992 - 1994," NBER Working Papers 4871, National Bureau of Economic Research, Inc.
    16. 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.
    17. Daines, Martin & Joyce, Michael & Tong, Matthew, 2012. "QE and the gilt market: a disaggregated analysis," Bank of England working papers 466, Bank of England.
    18. D’Amico, Stefania & King, Thomas B., 2013. "Flow and stock effects of large-scale treasury purchases: Evidence on the importance of local supply," Journal of Financial Economics, Elsevier, vol. 108(2), pages 425-448.
    19. Duffie, Darrell, 1996. " Special Repo Rates," Journal of Finance, American Finance Association, vol. 51(2), pages 493-526, June.
    20. Nicolae Garleanu & Lasse Heje Pedersen & Allen M. Poteshman, 2009. "Demand-Based Option Pricing," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4259-4299, October.
    21. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2012. "The Aggregate Demand for Treasury Debt," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 233 - 267.
    22. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," NBER Working Papers 17555, National Bureau of Economic Research, Inc.
    23. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
    24. D'Amico, Stefania & English, William & López-Salido, J David & Nelson, Edward, 2012. "The Federal Reserve’s Large-Scale Asset Purchase Programs: Rationale and Effects," CEPR Discussion Papers 9145, C.E.P.R. Discussion Papers.
    25. Canlin Li & Min Wei, 2012. "Term structure modelling with supply factors and the Federal Reserve's Large Scale Asset Purchase programs," Finance and Economics Discussion Series 2012-37, Board of Governors of the Federal Reserve System (U.S.).
    26. James D. Hamilton & Jing Cynthia Wu, 2011. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," NBER Working Papers 16956, National Bureau of Economic Research, Inc.
    27. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2010. "Large-scale asset purchases by the Federal Reserve: did they work?," Staff Reports 441, Federal Reserve Bank of New York.
    28. Robin Greenwood & Dimitri Vayanos, 2010. "Price pressure in the government bond market," LSE Research Online Documents on Economics 28618, London School of Economics and Political Science, LSE Library.
    29. Bing Han & Francis A. Longstaff & Craig Merrill, 2007. "The U.S. Treasury Buyback Auctions: The Cost of Retiring Illiquid Bonds," Journal of Finance, American Finance Association, vol. 62(6), pages 2673-2693, December.
    30. Svensson, Lars E O, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992-4," CEPR Discussion Papers 1051, C.E.P.R. Discussion Papers.
    31. 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.
    32. Iryna Kaminska & Dimitri Vayanos & Gabriele Zinna, 2011. "Preferred-Habitat Investors and the US Term Structure of Real Rates," FMG Discussion Papers dp674, Financial Markets Group.
    33. Xing Hu & Jun Pan & Jiang Wang, 2010. "Noise as Information for Illiquidity," NBER Working Papers 16468, National Bureau of Economic Research, Inc.
    34. Kenneth Kuttner, 2006. "Can Central Banks Target Bond Prices?," NBER Working Papers 12454, National Bureau of Economic Research, Inc.
    35. Greenwood, Robin, 2005. "Short- and long-term demand curves for stocks: theory and evidence on the dynamics of arbitrage," Journal of Financial Economics, Elsevier, vol. 75(3), pages 607-649, March.
    36. Gürkaynak, Refet S. & Wright, Jonathan, 2010. "Macroeconomics and the Term Structure," CEPR Discussion Papers 8018, C.E.P.R. Discussion Papers.
    37. Patrick Georges, . "The Vasicek and CIR Models and the Expectation Hypothesis of the Interest Rate Term Structure," Working Papers-Department of Finance Canada 2003-17, Department of Finance Canada.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2013-35. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.