HOW MACRO-LIQUIDITY IMPACTS MICROLIQUIDITY IN THE US TREASURY BOND MARKET

Abstract

Recent crisis has shown the value of liquidity as the dry up of liquidity had caused the financial markets to suffer. Market participants have difficulties in making transactions or liquidating their positions quickly at low cost. This paper will provide some valuable insights on the sources of macro-liquidity that have an impact on liquidity in the US Treasury bond market. Results shows that macro-liquidity from central bank has a larger impact on bond liquidity than the funding liquidity of various institutions. The significant source of funding liquidity from institutions is the issuance of corporate bonds and this is especially so in crisis periods. TED spread is also able to predict bond liquidity during expansion periods. Federal fund and discount rate, and temporary open market operations are the rather significant sources of macro-liquidity from central bank. The results do not show a clear indication as to whether macro-liquidity from central bank predicts better in contraction or expansion periods. Further, portfolio analysis shows that the issuance of corporate bonds impacts long term off the-run bond portfolios, while discount and federal fund rate impacts short-term off-the-run bond portfolios more than the other bond portfolios.