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Quantitative easing auctions of Treasury bonds

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  • Song, Zhaogang
  • Zhu, Haoxiang

Abstract

The Federal Reserve uses (reverse) auctions to implement its purchases of Treasury bonds in quantitative easing (QE). To evaluate dealers’ offers across multiple bonds, the Fed relies on its internal yield curve model, fitted to secondary market bond prices. From November 2010 to September 2011, a one standard deviation increase in the cheapness of a Treasury bond (how much the market price of the bond is below a model-implied value) increases the Fed’s purchase quantity of that bond by 276 million and increases the auction costs on that bond by 2.6 cents per $100 par value, controlling for standard covariates. Our results suggest that the Fed harvests gains from trades by purchasing undervalued bonds, but strategic dealers extract some profits because the Fed’s relative values can be partly inferred from price data.

Suggested Citation

  • Song, Zhaogang & Zhu, Haoxiang, 2018. "Quantitative easing auctions of Treasury bonds," Journal of Financial Economics, Elsevier, vol. 128(1), pages 103-124.
  • Handle: RePEc:eee:jfinec:v:128:y:2018:i:1:p:103-124
    DOI: 10.1016/j.jfineco.2018.02.004
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    Cited by:

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    3. Todorov, Karamfil, 2020. "Quantify the quantitative easing: Impact on bonds and corporate debt issuance," Journal of Financial Economics, Elsevier, vol. 135(2), pages 340-358.
    4. Zhiguo He & Paymon Khorrami & Zhaogang Song, 2019. "Commonality in Credit Spread Changes: Dealer Inventory and Intermediary Distress," NBER Working Papers 26494, National Bureau of Economic Research, Inc.
    5. Jiakai Chen & Haoyang Liu & Asani Sarkar & Zhaogang Song, 2020. "Dealers and the Dealer of Last Resort: Evidence from MBS Markets in the COVID-19 Crisis," Staff Reports 933, Federal Reserve Bank of New York.
    6. Beetsma, Roel & Giuliodori, Massimo & Hanson, Jesper & de Jong, Frank, 2020. "Determinants of the bid-to-cover ratio in Eurozone sovereign debt auctions," Journal of Empirical Finance, Elsevier, vol. 58(C), pages 96-120.
    7. Bo Young Chang & Jun Yang & Parker Liu, 2018. "The Cost of the Government Bond Buyback and Switch Programs in Canada," Staff Analytical Notes 2018-41, Bank of Canada.

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    More about this item

    Keywords

    Quantitative easing; Auction; Treasury bond; Federal Reserve;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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