Financial Market Implications of the Federal Debt Paydown

Michael J. Fleming

58 citations0/0 files storedBrookings Papers on Economic Activity

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Credit Risk and Financial Regulations Financial Markets and Investment Strategies Global Financial Crisis and Policies

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 towards 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.

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References

1998Predicting U.S. Recessions: Financial Variables as Leading Indicators 1996Special Repo Rates 1995Predicting U.S. Recessions: Financial Variables as Leading Indicators 1996Idiosyncratic Variation of Treasury Bill Yields 1991Liquidity, Maturity, and the Yields on U.S. Treasury Securities 1997Special Repo Rates: An Empirical Analysis 2012Liquidity, Maturity, and the Yields on U.S. Treasury Securities 1997The Round-the-Clock Market for U.S. Treasury Securities

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