Has Quantitative Easing Affected the U.S. Treasury Auction Market?

Abstract

A dataset of every U.S. Treasury auction from 2003 to 2012 investigates how Federal Reserve policy of quantitative easing (QE) affects the high-yield at Treasury auctions. Market structural factors known in advance (Federal funds rate, Standard and Poor’s, Chicago Board Option Exchange Market Volatility Index) are significant for the auction high-yield, but the relationships change with QE. The Federal-funds rate is less correlated to bills high-yield during QE. Before QE, equity market and risk channels have the same relationship to bond and bill high-yields. During QE, correlations tighten for bond high-yields, but drop dramatically for bills. Auction-specific bid-cover is more strongly negatively associated with bills high-yield during QE. indirect bidders (a proxy for foreign central banks) may put relatively more downward pressure on bond high-yields. The changes in these correlations could affect borrowing costs and Fed balance sheet exposure going forward.