Authors: Darrell Duffie, Michael J. Fleming, Frank M. Keane, Claire Nelson, Or Shachar, and Peter Van Tassel
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Staff Reports
Dealer Capacity and U.S. Treasury Market Functionality
Number 1070
August 2023 Revised October 2023
August 2023 Revised October 2023
JEL classification: G01, G1, G12, G18, E58
We show a significant loss in U.S. Treasury market functionality when intensive use of dealer balance sheets is needed to intermediate bond markets, as in March 2020. Although yield volatility explains most of the variation in Treasury market liquidity over time, when dealer balance sheet utilization reaches sufficiently high levels, liquidity is much worse than predicted by yield volatility alone. This is consistent with the existence of occasionally binding constraints on the intermediation capacity of bond markets.
Author Disclosure Statement(s)
Darrell Duffie
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Use of BrokerTec data was subject to review by BrokerTec Americas LLC. Use of regulatory corporate and regulatory MBS TRACE data was subject to review by the Financial Industry Regulatory Authority to ensure that non-public data are sufficiently aggregated and anonymized. Use of Treasury TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance to ensure that non-public data are sufficiently aggregated and anonymized (IAWG members include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of non-public FR 2004 data was subject to review by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York to ensure that these data are sufficiently aggregated and anonymized. Use of confidential supervisory information on value-at-risk and profit-and-loss for Board-regulated institutions subject to the Market Risk Rule was subject to review by the Board of Governors of the Federal Reserve System to ensure that these non-public regulatory data are sufficiently aggregated and anonymized. This paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Michael Fleming
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Use of BrokerTec data was subject to review by BrokerTec Americas LLC. Use of regulatory corporate and regulatory MBS TRACE data was subject to review by the Financial Industry Regulatory Authority to ensure that non-public data are sufficiently aggregated and anonymized. Use of Treasury TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance to ensure that non-public data are sufficiently aggregated and anonymized (IAWG members include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of non-public FR 2004 data was subject to review by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York to ensure that these data are sufficiently aggregated and anonymized. Use of confidential supervisory information on value-at-risk and profit-and-loss for Board-regulated institutions subject to the Market Risk Rule was subject to review by the Board of Governors of the Federal Reserve System to ensure that these non-public regulatory data are sufficiently aggregated and anonymized. This paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Frank Keane
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Use of BrokerTec data was subject to review by BrokerTec Americas LLC. Use of regulatory corporate and regulatory MBS TRACE data was subject to review by the Financial Industry Regulatory Authority to ensure that non-public data are sufficiently aggregated and anonymized. Use of Treasury TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance to ensure that non-public data are sufficiently aggregated and anonymized (IAWG members include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of non-public FR 2004 data was subject to review by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York to ensure that these data are sufficiently aggregated and anonymized. Use of confidential supervisory information on value-at-risk and profit-and-loss for Board-regulated institutions subject to the Market Risk Rule was subject to review by the Board of Governors of the Federal Reserve System to ensure that these non-public regulatory data are sufficiently aggregated and anonymized. This paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Claire Nelson
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. Use of BrokerTec data was subject to review by BrokerTec Americas LLC. Use of regulatory corporate and regulatory MBS TRACE data was subject to review by the Financial Industry Regulatory Authority to ensure that non-public data are sufficiently aggregated and anonymized. Use of Treasury TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance to ensure that non-public data are sufficiently aggregated and anonymized (IAWG members include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of non-public FR 2004 data was subject to review by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York to ensure the data are sufficiently aggregated and anonymized. Use of confidential supervisory information on value-at-risk and profit-and-loss for Board-regulated institutions subject to the Market Risk Rule was subject to review by the Board of Governors of the Federal Reserve System to ensure that these non-public regulatory data are sufficiently aggregated and anonymized. This paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Shachar Or
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. Use of BrokerTec data was subject to review by BrokerTec Americas LLC. Use of regulatory corporate and regulatory MBS TRACE data was subject to review by the Financial Industry Regulatory Authority to ensure that non-public data are sufficiently aggregated and anonymized. Use of Treasury TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance to ensure that non-public data are sufficiently aggregated and anonymized (IAWG members include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of non-public FR 2004 data was subject to review by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York to ensure that these data are sufficiently aggregated and anonymized. Use of confidential supervisory information on value-at-risk and profit-and-loss for Board-regulated institutions subject to the Market Risk Rule was subject to review by the Board of Governors of the Federal Reserve System to ensure that these non-public regulatory data are sufficiently aggregated and anonymized. This paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Peter Van Tassel
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Use of BrokerTec data was subject to review by BrokerTec Americas LLC. Use of regulatory corporate and regulatory MBS TRACE data was subject to review by the Financial Industry Regulatory Authority to ensure that non-public data are sufficiently aggregated and anonymized. Use of Treasury TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance to ensure that non-public data are sufficiently aggregated and anonymized (IAWG members include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of non-public FR 2004 data was subject to review by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York to ensure that these data are sufficiently aggregated and anonymized. Use of confidential supervisory information on value-at-risk and profit-and-loss for Board-regulated institutions subject to the Market Risk Rule was subject to review by the Board of Governors of the Federal Reserve System to ensure that these non-public regulatory data are sufficiently aggregated and anonymized. This paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Use of BrokerTec data was subject to review by BrokerTec Americas LLC. Use of regulatory corporate and regulatory MBS TRACE data was subject to review by the Financial Industry Regulatory Authority to ensure that non-public data are sufficiently aggregated and anonymized. Use of Treasury TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance to ensure that non-public data are sufficiently aggregated and anonymized (IAWG members include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of non-public FR 2004 data was subject to review by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York to ensure that these data are sufficiently aggregated and anonymized. Use of confidential supervisory information on value-at-risk and profit-and-loss for Board-regulated institutions subject to the Market Risk Rule was subject to review by the Board of Governors of the Federal Reserve System to ensure that these non-public regulatory data are sufficiently aggregated and anonymized. This paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Michael Fleming
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Use of BrokerTec data was subject to review by BrokerTec Americas LLC. Use of regulatory corporate and regulatory MBS TRACE data was subject to review by the Financial Industry Regulatory Authority to ensure that non-public data are sufficiently aggregated and anonymized. Use of Treasury TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance to ensure that non-public data are sufficiently aggregated and anonymized (IAWG members include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of non-public FR 2004 data was subject to review by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York to ensure that these data are sufficiently aggregated and anonymized. Use of confidential supervisory information on value-at-risk and profit-and-loss for Board-regulated institutions subject to the Market Risk Rule was subject to review by the Board of Governors of the Federal Reserve System to ensure that these non-public regulatory data are sufficiently aggregated and anonymized. This paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Frank Keane
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Use of BrokerTec data was subject to review by BrokerTec Americas LLC. Use of regulatory corporate and regulatory MBS TRACE data was subject to review by the Financial Industry Regulatory Authority to ensure that non-public data are sufficiently aggregated and anonymized. Use of Treasury TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance to ensure that non-public data are sufficiently aggregated and anonymized (IAWG members include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of non-public FR 2004 data was subject to review by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York to ensure that these data are sufficiently aggregated and anonymized. Use of confidential supervisory information on value-at-risk and profit-and-loss for Board-regulated institutions subject to the Market Risk Rule was subject to review by the Board of Governors of the Federal Reserve System to ensure that these non-public regulatory data are sufficiently aggregated and anonymized. This paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Claire Nelson
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. Use of BrokerTec data was subject to review by BrokerTec Americas LLC. Use of regulatory corporate and regulatory MBS TRACE data was subject to review by the Financial Industry Regulatory Authority to ensure that non-public data are sufficiently aggregated and anonymized. Use of Treasury TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance to ensure that non-public data are sufficiently aggregated and anonymized (IAWG members include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of non-public FR 2004 data was subject to review by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York to ensure the data are sufficiently aggregated and anonymized. Use of confidential supervisory information on value-at-risk and profit-and-loss for Board-regulated institutions subject to the Market Risk Rule was subject to review by the Board of Governors of the Federal Reserve System to ensure that these non-public regulatory data are sufficiently aggregated and anonymized. This paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Shachar Or
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. Use of BrokerTec data was subject to review by BrokerTec Americas LLC. Use of regulatory corporate and regulatory MBS TRACE data was subject to review by the Financial Industry Regulatory Authority to ensure that non-public data are sufficiently aggregated and anonymized. Use of Treasury TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance to ensure that non-public data are sufficiently aggregated and anonymized (IAWG members include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of non-public FR 2004 data was subject to review by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York to ensure that these data are sufficiently aggregated and anonymized. Use of confidential supervisory information on value-at-risk and profit-and-loss for Board-regulated institutions subject to the Market Risk Rule was subject to review by the Board of Governors of the Federal Reserve System to ensure that these non-public regulatory data are sufficiently aggregated and anonymized. This paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Peter Van Tassel
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Use of BrokerTec data was subject to review by BrokerTec Americas LLC. Use of regulatory corporate and regulatory MBS TRACE data was subject to review by the Financial Industry Regulatory Authority to ensure that non-public data are sufficiently aggregated and anonymized. Use of Treasury TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance to ensure that non-public data are sufficiently aggregated and anonymized (IAWG members include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of non-public FR 2004 data was subject to review by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York to ensure that these data are sufficiently aggregated and anonymized. Use of confidential supervisory information on value-at-risk and profit-and-loss for Board-regulated institutions subject to the Market Risk Rule was subject to review by the Board of Governors of the Federal Reserve System to ensure that these non-public regulatory data are sufficiently aggregated and anonymized. This paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Suggested Citation:
Duffie, Darrell, Michael Fleming, Frank Keane, Claire Nelson, Or Shachar, and Peter Van Tassel. 2023. “Dealer Capacity and U.S. Treasury Market Functionality.” Federal Reserve Bank of New York Staff Reports, no. 1070, August. https://doi.org/10.59576/sr.1070
Duffie, Darrell, Michael Fleming, Frank Keane, Claire Nelson, Or Shachar, and Peter Van Tassel. 2023. “Dealer Capacity and U.S. Treasury Market Functionality.” Federal Reserve Bank of New York Staff Reports, no. 1070, August. https://doi.org/10.59576/sr.1070
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