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The U.S. Treasury Buyback Auctions: The Cost of Retiring Illiquid Bonds
Author(s) -
HAN BING,
LONGSTAFF FRANCIS A.,
MERRILL CRAIG
Publication year - 2007
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2007.01289.x
Subject(s) - treasury , common value auction , bond , debt , business , monetary economics , financial system , economics , finance , microeconomics , geography , archaeology
We study an important recent series of buyback auctions conducted by the U.S. Treasury in retiring $67.5 billion of its illiquid off‐the‐run debt. The Treasury was successful in buying back large amounts of illiquid debt while suffering only a small market‐impact cost. The Treasury included the most‐illiquid bonds more frequently in the auctions, but tended to buy back the least‐illiquid of these bonds. Although the Treasury had the option to cherry pick from among the bonds offered, we find that the Treasury was actually penalized for being spread too thinly in the buybacks.