The Periodic Treasury Exchange: A Proposal to Increase the Depth and Liquidity of the U.S. Treasury Market

In recent years, the liquidity of many fixed income markets has declined as banks have stepped away from their traditional role as market makers, but the balance sheets of many electronic market makers are not large enough to support significant positions, particularly in off-the-run securities. In...

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Bibliographic Details
Published in:Journal of portfolio management 2018-01, Vol.44 (3), p.126-131
Main Authors: Philips, Thomas K., Friedman, Steven
Format: Article
Language:English
Subjects:
Bond issues
Borrowing
Capital markets
Central banks
Debt management
Efficiency
Futures
Liquidity
Random variables
Treasuries
Treasury bonds
Volatility
Yield curve
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Summary:In recent years, the liquidity of many fixed income markets has declined as banks have stepped away from their traditional role as market makers, but the balance sheets of many electronic market makers are not large enough to support significant positions, particularly in off-the-run securities. In this article, the authors propose a mechanism by which off-the-run Treasury securities can be exchanged periodically with the Department of the Treasury for on-the-run Treasury securities, allowing market participants to better hedge their books, and therefore to transact in significantly larger sizes without fear of disrupting the market or experiencing significant losses from a widening of the basis between near-offsetting long and short positions.
ISSN:0095-4918
2168-8656
DOI:10.3905/jpm.2018.44.3.126