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Flow and Stock Effects of Large-Scale Treasury Purchases
This is a print on demand edition of a hard to find publication. Using a panel of daily CUSIP-level data, the authors study the effects of the Federal Reserve¿s program to purchase $300 billion of U.S. Treasury coupon securities announced and implemented during 2009. The authors find that each purchase operation, on average, caused a decline in yields in the sector purchased of 3.5 basis points on the days when these purchases occurred (the ¿flow effect¿ of the program). In addition, the program as a whole resulted in a persistent downward shift in the yield curve of as much as 50 basis points (the ¿stock effect¿), with the largest impact in the 10- to 15-year sector. The coefficient patterns generally support a view of segmentation or imperfect substitution within the Treasury market. Charts and tables.
Unexpected Supply Effects of Quantitative Easing and Tightening
To analyze the evolution of quantitative easingís (QE) and tighteningís (QT) e§ects across consecutive announcements, we focus on their unexpected component. Treasury yield sensitivities to QE and QT supply surprises do not fall monotonically over time, thus later announcements seemed to remain powerful; yield sensitivities to QT surprises are on average larger than sensitivities to QE surprises, implying supply e§ects did not diminish during periods of market calm amid economic expansion; Önally, yield sensitivities are ampliÖed by the amount of interest-rate uncertainty prevailing before the announcement, implying that turning points in the balance sheet policy tended to elicit larger reactions.
Tips from TIPS
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Density Selection and Combination Under Model Ambiguity
"This paper proposes a method for predicting the probability density of a variable of interest in the presence of model ambiguity. In the first step, each candidate parametric model is estimated minimizing the Kullback-Leibler 'distance' (KLD) from a reference nonparametric density estimate. Given that the KLD represents a measure of uncertainty about the true structure, in the second step, its information content is used to rank and combine the estimated models.
Impacts of the Fed Corporate Credit Facilities Through the Lenses of ETFs and CDX
In this study, we use the liquid and efficient bond ETF prices and CDX spreads to quantify the effects of the announcements of the Primary and Secondary Market Corporate Credit Facilities on the underlying corporate bonds. We find that those announcements triggered: (i) large and positive jumps in the prices of directly-eligible ETFs as well as ETFs holding eligible bonds and their close substitutes; (ii) a discrete drop in the perceived credit risk of eligible bonds especially following the April 9th announcement; (iii) a roaring back of investment-grade issuance and a pick-up in high-yield issuance. Importantly, across all ETFs in our sample, the magnitude of their price response does not seem directly related to the size of the reduction in either credit risk or liquidity risk, but rather appears to reflect mostly the eligibility of the ETF and its underlying bonds at the Federal Reserve facilities. This leads us to believe that the main factor driving the reaction to the announcements might be the elimination of "disaster risk" for eligible issuers.
