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The Scarcity Value of Treasury Collateral: Repo-Market Effects of Security-Specific Supply and Demand Factors

Published online by Cambridge University Press:  08 October 2018

Stefania D’Amico ,
Roger Fan  and
Yuriy Kitsul
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Abstract

We quantify the scarcity value of Treasury collateral by estimating the impact of security-specific demand and supply factors on the specific collateral repurchase agreement (repo) rates of all outstanding U.S. Treasury securities. We find a positive and significant scarcity premium for on- and off-the-run Treasuries that persists for approximately 3 months and is larger in magnitude for shorter-term securities. This scarcity effect seems to pass through to Treasury cash market prices, providing additional evidence for the scarcity channel of quantitative easing (QE). On the contrary, the Federal Reserve’s reverse repo operations could help reduce the scarcity premium by alleviating potential shortages of high-quality collateral.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 5 , October 2018 , pp. 2103 - 2129
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We are grateful to Gadi Barlevy, Hendrik Bessembinder (the editor), Michael Fleming, Francois Gourio, Frank Keane, Thomas King, Eric LeSueur, Dina Marchioni, Pamela Moulton (the referee), Sean Savage, John Sporn, Bin Wei, Toshiki Yotsuzuka, seminar and conference participants (2014 International Conference on Sovereign Bond Markets, 2014 European Finance Association (EFA) Conference, 2015 Federal Reserve System Day-Ahead Conference), the Monetary and Financial Analysis Division at the Bank of England, and the Market Operations Monitoring and Analysis (MOMA) group at the Federal Reserve Bank of Chicago for useful discussions and comments. We also thank Dominic Anene, Long Bui, Scott Konzem, and Tanya Perkins for their help with data preparation. All errors and omissions are our sole responsibility. The views expressed in this article are those of the authors alone and do not necessarily reflect the views of the Federal Reserve Bank of Chicago, the Board of Governors of the Federal Reserve System, the Federal Reserve System, or their staff. This article was written while Fan was at the Federal Reserve Bank of Chicago.

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