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Board of Governors of the Federal Reserve System (U.S.)
Finance and Economics Discussion Series
Price Pressure and Price Discovery in the Term Structure of Interest Rates
Scott Mixon
Tugkan Tuzun
Abstract

We study the price pressure and price discovery effects in the U.S. Treasury market by using a term structure model. Our model decomposes yield curve shifts into two components: a virtually permanent change related to order flow and a transitory, price pressure effect due to dealer inventories. We find strong evidence that net dealer Treasury inventories has impact on the yield curve. Cash Treasury instruments in inventory have a larger impact on yields than futures contracts, suggesting that cash and futures inventories are not perfect substitutes. Price discovery in the level of interest rates is most strongly linked to non-dealer order flow in the 10-year futures contract, while price discovery in the slope of the curve is linked to order flow in the 10-year futures and the 5-year cash market.


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Scott Mixon & Tugkan Tuzun, Price Pressure and Price Discovery in the Term Structure of Interest Rates, Board of Governors of the Federal Reserve System (U.S.), Finance and Economics Discussion Series 2018-065, 28 Sep 2018.
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Keywords: Dealers ; Liquidity ; Price discovery ; Price pressure ; Treasury market
DOI: 10.17016/FEDS.2018.065
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