Abstract
We study the yields in the German treasury bills market. We take a detailed look at the yield banks require to buy treasury bills in the primary market, and we also examine the yield households and nonbank firms demand to buy these bills in the secondary market. We use data from real world tenders to show that the bids set by banks are in accordance with the predictions of our theoretical framework. In particular, we show that current monetary policy and the market’s expectations regarding the future path of monetary policy can be used to define an interval in which the bids from banks lie. Our theoretical predictions for the secondary market also match the data.
Highlights
German Treasury Bonds are generally considered to be one of the least risky assets available in the market
We look at the determinants of the interest rate on German Treasury Bills, studying in great detail the linkages between this interest rate, interbank interest rates and current and future monetary policy
A second contribution of this paper is to examine the secondary market for German Treasury Bills (T-Bills) and the way the interest rate is determined in this market
Summary
German Treasury Bonds are generally considered to be one of the least risky assets available in the market. They are a benchmark against which most other investments are compared. Investors compare the expected rate of return on a given risky investment to what they would obtain if they bought Germany Treasury Bonds instead. Several authors have examined the relation between the federal funds (FF) interest rate and the T-Bills interest rate in the US. These two variables are linked by the expectations hypothesis, with the T-Bills rate being
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