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The scarcity value of Treasury collateral: Repo market effects of security-specific supply and demand factors

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  • D'Amico, Stefania

    () (Federal Reserve Bank of Chicago)

  • Fan, Roger

    () (Federal Reserve Bank of Chicago)

  • Kitsul, Yuriy

    () (Board of Governors of the Federal Reserve System (U.S.))

Abstract

In the special collateral repo market, forward agreements are security-specific, which may magnify demand and supply effects. We quantify the scarcity value of Treasury collateral by estimating the impact of security-specific demand and supply factors on the repo rates of all outstanding U.S. Treasury securities. We find an economically and statistically significant scarcity premium. This scarcity effect is quite persistent, passes through to Treasury market prices, and explains a significant portion of the flow-effects of LSAP programs, providing additional evidence for the scarcity channel of QE. Through the same mechanism, the Fed's reverse repo operations could alleviate potential shortages of high-quality collateral.

Suggested Citation

  • D'Amico, Stefania & Fan, Roger & Kitsul, Yuriy, 2014. "The scarcity value of Treasury collateral: Repo market effects of security-specific supply and demand factors," Finance and Economics Discussion Series 2014-60, Board of Governors of the Federal Reserve System (US).
  • Handle: RePEc:fip:fedgfe:2014-60
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    Cited by:

    1. Ferrari, Massimo & Guagliano, Claudia & Mazzacurati, Julien, 2017. "Collateral scarcity premia in euro area repo markets," ESRB Working Paper Series 55, European Systemic Risk Board.
    2. Yuriy Kitsul & Marcelo Ochoa, 2016. "Funding Liquidity Risk and the Cross-section of MBS Returns," Finance and Economics Discussion Series 2016-052, Board of Governors of the Federal Reserve System (US).
    3. Schlepper, Kathi & Riordan, Ryan & Hofer, Heiko & Schrimpf, Andreas, 2017. "Scarcity effects of QE: A transaction-level analysis in the Bund market," Discussion Papers 06/2017, Deutsche Bundesbank.
    4. W. Arrata & B. Nguyen & I. Rahmouni-Rousseau & M. Vari, 2017. "Eurosystem’s asset purchases and money market rates," Working papers 652, Banque de France.
    5. Corradin, Stefano & Maddaloni, Angela, 2017. "The importance of being special: repo markets during the crisis," Working Paper Series 2065, European Central Bank.
    6. W. Arrata & B. Nguyen, 2017. "Price impact of bond supply shocks: Evidence from the Eurosystem's asset purchase program," Working papers 623, Banque de France.
    7. Brand, Claus & Ferrante, Lorenzo & Hubert, Antoine, 2019. "From cash- to securities-driven euro area repo markets: the role of financial stress and safe asset scarcity," Working Paper Series 2232, European Central Bank.
    8. repec:eee:jfinec:v:128:y:2018:i:1:p:103-124 is not listed on IDEAS

    More about this item

    Keywords

    Treasury bonds; repo contracts; supply-demand factors; liquidity; Large Scale Asset Purchase programs; Treasury auctions;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G19 - Financial Economics - - General Financial Markets - - - Other

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