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Financial market implications of the federal debt paydown

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Abstract

U.S. Treasury securities fill several crucial roles in financial markets: they are a risk-free benchmark, a reference and hedging benchmark, and a reserve asset to the Federal Reserve and other financial institutions. Many of the features that make the Treasury market an attractive benchmark and reserve asset are likely to be adversely affected by the paydown of the federal debt, and recent developments suggest that this may be happening already. Market participants are responding by moving away from Treasuries as a reference and hedging benchmark toward agency debt securities, corporate debt securities, and interest rate swaps. The Federal Reserve is taking steps to adjust its portfolio and should be able to do so with minimal implications for monetary policy.

Suggested Citation

  • Michael J. Fleming, 2001. "Financial market implications of the federal debt paydown," Staff Reports 120, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:120
    Note: For a published version of this report, see Michael J. Fleming, "Financial Market Implications of the Federal Debt Paydown," Brookings Papers on Economic Activity, no.2 (2000): 221-51.
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    References listed on IDEAS

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    5. Kenneth Barbade & Paul Bennett & John Kambhu, 2000. "Enhancing the liquidity of U.S. Treasury securities in an era of surpluses," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 89-119.
    6. Paul Bennett & Kenneth Garbade & John Kambhu, 1999. "Enhancing the Liquidity of U.S. Treasury Securities in an Era of Surpluses," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-083, New York University, Leonard N. Stern School of Business-.
    7. Marc R. Saidenberg & Philip E. Strahan, 1999. "Are banks still important for financing large businesses?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 5(Jul).
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    10. Duffie, Darrell, 1996. "Special Repo Rates," Journal of Finance, American Finance Association, vol. 51(2), pages 493-526, June.
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    Citations

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    Cited by:

    1. Michael J. Fleming & Kenneth D. Garbade, 2005. "Explaining settlement fails," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 11(Sep).
    2. Fleming, Michael J. & Garbade, Kenneth D., 2007. "Dealer behavior in the specials market for US Treasury securities," Journal of Financial Intermediation, Elsevier, vol. 16(2), pages 204-228, April.
    3. Mr. Michael Kumhof & Mr. Evan C Tanner, 2005. "Government Debt: A Key Role in Financial Intermediation," IMF Working Papers 2005/057, International Monetary Fund.
    4. Henning Bohn, 2011. "The Economic Consequences of Rising U.S. Government Debt: Privileges at Risk," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 67(3), pages 282-302, September.
    5. Roberto Blanco, 2002. "Euro area government securities markets: recent developments and implications for market functioning," BIS Papers chapters, in: Bank for International Settlements (ed.), Market functioning and central bank policy, volume 12, pages 65-85, Bank for International Settlements.
    6. David Goldreich & Bernd Hanke & Purnendu Nath, 2005. "The Price of Future Liquidity: Time-Varying Liquidity in the U.S. Treasury Market," Review of Finance, Springer, vol. 9(1), pages 1-32, March.
    7. Study group on fixed income markets, 2001. "The changing shape of fixed income markets," BIS Papers chapters, in: Bank for International Settlements (ed.), The changing shape of fixed income markets: a collection of studies by central bank economists, volume 5, pages 1-43, Bank for International Settlements.
    8. Mr. Iryna V. Ivaschenko & Mr. Jorge A Chan-Lau, 2001. "Corporate Bond Risk and Real Activity: An Empirical Analysis of Yield Spreads and Their Systematic Components," IMF Working Papers 2001/158, International Monetary Fund.
    9. Kenneth D. Garbade & John Kambhu, 2005. "Why is the U.S. Treasury contemplating becoming a lender of last resort for Treasury securities?," Staff Reports 223, Federal Reserve Bank of New York.
    10. Michael J. Fleming & Kenneth D. Garbade, 2004. "Repurchase agreements with negative interest rates," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 10(Apr).
    11. Brutti, Filippo, 2011. "Sovereign defaults and liquidity crises," Journal of International Economics, Elsevier, vol. 84(1), pages 65-72, May.
    12. Tarun Chordia & Asani Sarkar & Avanidhar Subrahmanyam, 2001. "Common determinants of bond and stock market liquidity: the impact of financial crises, monetary policy, and mutual fund flows," Staff Reports 141, Federal Reserve Bank of New York.
    13. the Study group on fixed income markets, 2001. "The changing shape of fixed income markets," BIS Working Papers 104, Bank for International Settlements.
    14. Claudio E. V. Borio, 2004. "Market distress and vanishing liquidity: anatomy and policy options," BIS Working Papers 158, Bank for International Settlements.
    15. Orazio Mastroeni, 2001. "Pfandbrief-style products in Europe," BIS Papers chapters, in: Bank for International Settlements (ed.), The changing shape of fixed income markets: a collection of studies by central bank economists, volume 5, pages 44-66, Bank for International Settlements.

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    More about this item

    Keywords

    Treasury market; benchmark; reserve asset; liquidity;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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