Treasury Securities Market Research Articles

Fixed Income Market Structure: Treasuries vs. Agency MBS

This FEDS Note analyzes the structure of the agency mortgage-backed securities (MBS) market through the lens of the TRACE Treasury data initiative, which is a significant component of a broader inter-agency effort to enhance understanding and transparency of the Treasury securities market. As in several previous FEDS Notes describing the Treasury cash market structure, this note uses transactions reported to the Financial Industry Regulatory Authority (FINRA)'s Trade Reporting and Compliance Engine (TRACE) to examine aggregate trading volumes in the agency MBS market across venues, security types and participants. We show how agency MBS provide a useful counterfactual to cash Treasuries when analyzing the evolution of Treasury cash market structure and its implications for liquidity. We provide evidence that the participation of Principal Trading Firms (PTFs) in Treasury markets has caused the overall volume of intermediation to rise there, particularly in the interdealer broker (IDB) venue. We also find that, relative to Treasury markets, intermediation in the agency MBS market is concentrated among fewer firms, and in particular the primary dealers, suggesting that PTF participation in Treasury markets has diversified intermediation in the IDB venue across a larger number of firms.

Tick Size Change and Market Quality in the U.S. Treasury Market

This paper studies the effects of a recent tick size reduction in the U.S. Treasury securities market. We find significantly narrower bid-ask spreads, increased trading activity, improveddepth within one old tick despite lower overall market depth, and improved price efficiency.Moreover, slow traders become more competitive in liquidity provision and price improvement.Finally, high-frequency price discovery shifts to the smaller-tick cash market from the associatedfutures market, supporting the idea that a finer pricing grid allows traders to act promptly on even small information signals otherwise not profitable. Overall, we conclude that the tick sizereduction improves market quality.

Price and Size Discovery in Financial Markets: Evidence from the U.S. Treasury Securities Market

Abstract We study the workup protocol, an important size discovery mechanism in the U.S. Treasury market. We find that workup order flow shocks explain 6%–8% of the variation of returns on benchmark notes and, across maturities, 10% of the variation of the yield curve level factor. Information related to proprietary client order flow is more likely to show up in workup trades, whereas information derived from public announcements tends to come through preworkup trades. Our findings highlight how the nature of information affects the trade-off between speed and execution price when informed traders choose between the lit and workup channels. Received May 3, 2017; Editorial decision August 1, 2018 by Editor Thierry Foucault. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online. Internet Appendix tables are numbered with “IA” prefix.

The Impact of the Employment Report and Forecasts Thereof on Fixed-Income Markets

The authors examine the impact that the monthly Employment Situation Report issued by the Bureau of Labor Statistics (BLS) and the analyst forecasts of that report have on the U.S. Treasury securities market. Surprise increases in total non-farm payroll employment lead to increases in interest rates (especially one- to five-year rates), and surprise decreases lead to smaller declines in interest rates. This interest rate reaction is conditioned on the level of analyst uncertainty about the coming report. Interest rates also react to subsequent revisions of the payroll employment figures. Analyst forecasts as compiled by Bloomberg are unbiased forecasts of the BLS numbers and correctly anticipate most employment level changes. Moreover, there is evidence that the markets react to these forecasts prior to the BLS release. The authors also find that the release of the employment report lowers market uncertainty about future interest rates.

The microstructure of a U.S. Treasury ECN: The BrokerTec platform

We assess the microstructure of the U.S. Treasury securities market following its migration to electronic trading. We model price discovery using a vector autoregression model of price and order flow. We show that both trades and limit orders affect price dynamics, suggesting that traders also choose limit orders to exploit their information. Moreover, while limit orders have a smaller price impact, their greater variation contributes more to the variance of price updates. Lastly, we find an increased price impact of trades and especially limit orders following announcements, suggesting that the private information derived from public information is disproportionally exploited through limit orders.

Positive Feedback Trading Under Stress: Evidence from the US Treasury Securities Market

A vector autoregression (VAR) is estimated on tick-by-tick data for quote-changes and signed trades of 2-year, 5-year and 10-year on-the-run US Treasury notes. Confirming the results found by Hasbrouck and others for the stock market, signed order flow tends to exert a strong effect on prices. More interestingly, however, there is often a strong effect in the opposite direction, particularly at times of volatile trading. Price declines elicit sales and price increases elicit purchases. An examination of tick-by-tick trading on an especially volatile day confirms this finding. At least in the US Treasury market, trades and price movements appear likely to exhibit positive feedback at short horizons, particularly during periods of market stress. This suggests that the standard analytical approach to the microstructure of financial markets, which focuses on the ways in which the information possessed by informed traders becomes incorporated into market prices through order flow, should be complemented by an account of how price changes affect trading decisions.

Liquidity, Volatility, and Flights to Safety in the U.S. Treasury Market: Evidence from a New Class of Dynamic Order Book Models

We propose a new class of dynamic order book models that allow us to 1) study episodes of extreme low liquidity and 2) unite liquidity and volatility in one framework through which their joint dynamics can be examined. Liquidity and volatility in the U.S. Treasury securities market are analyzed around the time of economic announcements, throughout the recent financial crisis, and during flight-to-safety episodes. We document that Treasury market depth declines sharply during the crisis, accompanied by increased price volatility, but that trading activity seems unaffected until after the Lehman Brothers bankruptcy. Our models’ key finding is that price volatility and depth at the best bid and ask prices exhibit a negative feedback relationship and that each becomes more persistent during the crisis. Lastly, we characterize the Treasury market during flights to safety as having much lower market depth, along with higher trading volume and greater price uncertainty.

The Microstructure of a U.S. Treasury ECN: The Brokertec Platform

This paper assesses the microstructure of the U.S. Treasury securities market using tick data from the BrokerTec electronic trading platform. We examine trading activity, bid-ask spreads, and depth for the on-the-run 2-, 3-, 5-, 10- and 30-year securities and find that liquidity is markedly greater than that reported by earlier studies using data from GovPX. We analyze the price impact of trades and find that the effects are overstated if order book changes are ignored, and that order book changes affect prices by themselves. We also explore a novel feature of this platform, the ability to enter 'iceberg' orders, and find that such orders are more common when price volatility is higher, as'predicted by theory.

The Microstructure of a U.S. Treasury ECN: The Brokertec Platform

This paper assesses the microstructure of the U.S. Treasury securities market using tick data from the BrokerTec electronic trading platform. We examine trading activity, bid-ask spreads, and depth for the on-the-run 2-, 3-, 5-, 10- and 30-year securities and find that liquidity is markedly greater than that reported by earlier studies using data from GovPX. We analyze the price impact of trades and find that the effects are overstated if order book changes are ignored, and that order book changes affect prices by themselves. We also explore a novel feature of this platform – the ability to enter iceberg orders – and find that such orders are more common when price volatility is higher, as predicted by theory.

The Microstructure of the U.S. Treasury Market

This article discusses the microstructure of the U.S. Treasury securities market. Treasury securities are nominally riskless debt instruments issued by the U.S. government. Microstructural analysis is a field of economics/finance that examines the roles played by heterogenous agents, institutional detail, and asymmetric information in the trading process. The article describes types of Treasury issues; stages of the Treasury market; the major players, including the role of the Federal Reserve Bank of New York and the interdealer brokers; the structure of both the spot and futures markets; the findings of the seasonality/announcement and order book literature; and research on price discovery. We conclude by discussing possible future avenues of research.

Positive Feedback Trading Under Stress: Evidence from the US Treasury Securities Market

A vector autoregression is estimated on tick-by-tick data for quote-changes and signed trades of 2-year, 5-year and 10-year on-the-run US Treasury notes. Confirming the results found by Hasbrouck (1991) and others for the stock market, signed order flow tends to exert a strong effect on prices. More interestingly, however, there is often a strong effect in the opposite direction, particularly at times of volatile trading. Price declines elicit sales and price increases elicit purchases. An examination of tick-by-tick trading on an especially volatile day confirms this finding. At least in the US Treasury market, trades and price movements appear likely to exhibit positive feedback at short horizons, particularly during periods of market stress. This suggests that the standard analytical approach to the microstructure of financial markets, which focuses on the ways in which the information possessed by informed traders becomes incorporated into market prices through order flow, should be complemented by an account of how price changes affect trading decisions.

Many Faces of Liquidity and Asset Pricing: Evidence from the U.S. Treasury Securities Market

This paper tests the illiquidity premium hypothesis using U.S. Treasury securities intraday interdealer data. In contrast to the existing literature where notes are matched with bills in terms of maturity date, we compare notes with other notes maturing on the same day. One reason for comparing notes with notes rather than notes with bills is that differences in tax treatment across bills and notes could confront an experiment to measure the illiquidity effect. We find that notes are quoted at essentially identical prices despite substantial differences in their liquidity. This rejection of the hypothesis is in sharp contrast to the result of previous studies (Amihud and Mendelson, 1991). Therefore we reconsider the evidence based on matched bills and notes. We identify cross-sectional variation in bill-note pricing differences that cannot be supported by the illiquidity premium hypothesis. We also show that the pricing difference is smaller for matches with on-the-run bills, although the difference in liquidity between these bills and notes is significantly larger.

What Moves Bond Prices?

This article takes a close look at a year in the U.S. Treasury securities market and tries to explain the sharpest price changes. The authors attribute each of the twenty-five largest price shocks during August of 1993 to August 1994 period to a just-released macro-economic announcement. They also measure the bond market9s average reaction to various announcements and the reactions to surprise in the announcements headline numbers. The strongest responses are found to come from the employment, producer price index, and fed funds target rate announcements. Significant responses to U.S. Treasury security auctions results are documented for the first time.

The Treasury Securities Market: Overview and Recent Developments

The market for U.S. Treasury securities is by many measures the largest, most active debt market in the world, and the securities play a pivotal role in world financial markets. The market has evolved over time in keeping with the changing needs of both the Treasury and investors. After describing the market's structure and examining the factors driving the demand for Treasury securities in some detail, this article discusses recent developments, including the introduction of inflation-indexed securities and a decline in the issuance of Treasury securities.

Stripping of Treasury Securities and Segmentation in the Treasury Securities Market

Stripping of Treasury Securities and Segmentation in the Treasury Securities Market

Government Bond Returns, Measurement of Interest Rate Risk, and the Arbitrage Pricing Theory

ABSTRACTEmpirical tests are reported for Ross' arbitrage pricing theory using monthly data for U.S. Treasury securities during the 1960–1979 period. We find that mean returns on bond portfolios are linearly related to at least two factor loadings. Multivariate test results, however, are not consistent with the APT. Our sample data in the U.S. Treasury securities market are also not consistent with either version of the CAPM. One‐month‐ahead forecasts of excess returns using factor‐generating models are compared with corresponding naive predictions or predictions using the “market model” with various market portfolios.

The Determinants of the Treasury Security Yield Curve

ABSTRACTInvestors' security demands and two points on the yield curve are jointly determined using a disaggregated structural model of the U.S. Treasury securities market. The empirical results indicate that the structural model is capable of accurately explaining Treasury yields and that changes in a variety of nonyield variables affect the yield curve. Among these nonyield variables are Treasury security supplies, which are found to have significant but somewhat volatile impacts depending on investors' wealth flows. The within‐sample predictions from the structural model are also compared to those of a naive model.

The Determinants of the Treasury Security Yield Curve

Investors' security demands and two points on the yield curve are jointly determined using a disaggregated structural model of the U.S. Treasury securities market. The empirical results indicate that the structural model is capable of accurately explaining Treasury yields and that changes in a variety of nonyield variables affect the yield curve. Among these nonyield variables are Treasury security supplies, which are found to have significant but somewhat volatile impacts depending on investors' wealth flows. The within-sample predictions from the structural model are also compared to those of a naive model.

Price Dispersion in the Government Securities Market

This paper investigates the characteristics of price dispersion in the U.S. Treasury securities market. After a theoretical treatment of why such dispersion exists, empirical evidence is presented which shows that dispersion is influenced by characteristics of securities (such as volume and maturity) and by market supply-demand conditions (as reflected in price-level changes). It is also shown that the cost of liquidity services in a competitive market is determined by price dispersion and is not equal to the bid-ask spread.

PORTFOLIO OPERATIONS OF COMMERCIAL BANKS AND THE LEVEL OF TREASURY SECURITY PRICES

NOT ONLY WERE commercial banks the largest and most active investor-traders in the Treasury securities market after 1945, but their holdings of Treasury securities fluctuated widely relative to those of other investors. Further, it appears that oscillations in bank holdings of Treasury securities go far toward determining their price-yield movements. Reversing prewar experience and the putatively normal pattern of yield relationships between Treasury and corporate securities, yields on Treasury securities rose and fell over a wider range, for the most part, than did yields on corporate securities. The instability of yields of Treasury securities in the postwar year calls for a re-examination of traditional notions concerning Treasury securities and a re-evaluation of the role of commercial banks in the Treasury securities market.