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Dealer Balance Sheet Capacity and Market Liquidity during the 2013 Selloff in Fixed-Income Markets

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Abstract

Long-term interest rates hit record-low levels in 2012 but have since increased substantially. As discussed in an earlier post, the sharpest increase occurred between May 2 and July 5 of this year, with the ten-year Treasury yield rising from 1.63 percent to 2.74 percent. During the May-July episode, market liquidity also deteriorated. Some market participants have suggested that constraints on dealer balance sheet capacity impaired liquidity during the selloff, amplifying the magnitude and speed of the rise in interest rates and volatility. In this post, we review the evolution of Treasury market liquidity, evaluate whether dealer balance sheet capacity amplified the selloff, and examine what motivated dealer behavior during the episode.

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  • Tobias Adrian & Michael J. Fleming & Jonathan Goldberg & Morgan Lewis & Fabio M. Natalucci & Jason J. Wu, 2013. "Dealer Balance Sheet Capacity and Market Liquidity during the 2013 Selloff in Fixed-Income Markets," Liberty Street Economics 20131016a, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:86899
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    Cited by:

    1. Silvia Bressan, 0. "A Short Note on the Funding of Investment Firms Across the Crisis: Did the Turmoil Bring Changes?," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 0, pages 3.
    2. Erik Vogt & Michael Fleming & Or Shachar & Tobias Adrian, 2017. "Market Liquidity After the Financial Crisis," Annual Review of Financial Economics, Annual Reviews, vol. 9(1), pages 43-83, November.
    3. Silvia Bressan, 2017. "A Short Note on the Funding of Investment Firms Across the Crisis: Did the Turmoil Bring Changes?," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 7(1), pages 1-3.
    4. Darrell Duffie & Michael J. Fleming & Frank M. Keane & Claire Nelson & Or Shachar & Peter Van Tassel, 2023. "Dealer Capacity and U.S. Treasury Market Functionality," Staff Reports 1070, Federal Reserve Bank of New York.
    5. Beetsma, Roel & de Jong, Frank & Giuliodori, Massimo & Hanson, Jesper, 2016. "Domestic and Cross-Border Auction Cycle Effects of Sovereign Bond Issuance in the Euro Area," CEPR Discussion Papers 11122, C.E.P.R. Discussion Papers.
    6. Abhishek Kumar & Sushanta Mallick & Madhusudan Mohanty & Fabrizio Zampolli, 2023. "Market Volatility, Monetary Policy and the Term Premium," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(1), pages 208-237, February.
    7. De Pooter, Michiel & Favara, Giovanni & Modugno, Michele & Wu, Jason, 2021. "Monetary policy uncertainty and monetary policy surprises," Journal of International Money and Finance, Elsevier, vol. 112(C).
    8. Michael J. Fleming & Haoyang Liu & Rich Podjasek & Jake Schurmeier, 2022. "The Federal Reserve’s Market Functioning Purchases," Economic Policy Review, Federal Reserve Bank of New York, vol. 28(1), pages 210-241, July.
    9. De Pooter, Michiel & Favara, Giovanni & Modugno, Michele & Wu, Jason, 2021. "Reprint: Monetary policy uncertainty and monetary policy surprises," Journal of International Money and Finance, Elsevier, vol. 114(C).
    10. Jiakai Chen & Haoyang Liu & Asani Sarkar & Zhaogang Song, 2020. "Dealers and the Dealer of Last Resort: Evidence from the Agency MBS Markets in the COVID-19 Crisis," Staff Reports 933, Federal Reserve Bank of New York.
    11. International Monetary Fund, 2015. "United States: Financial Sector Assessment Program-Stress Testing-Technical Notes," IMF Staff Country Reports 2015/173, International Monetary Fund.
    12. Roel Beetsma & Massimo Giuliodori & Jesper Hanson & Frank De Jong, 2018. "Cross‐Border Auction Cycle Effects of Sovereign Bond Issuance in the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(7), pages 1401-1440, October.
    13. Jieun Lee, 2023. "Dollar and government bond liquidity: evidence from Korea," BIS Working Papers 1145, Bank for International Settlements.

    More about this item

    Keywords

    positions; liquidity; selloff; Dealers; fixed income;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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