BIG­FI/Fin­ance Sem­in­ar with Man­av Chaud­hary, Lon­don School of Eco­nom­ics

Please join us for a BIGFI/Finance Seminar with Manav Chaudhary, London School of Economics.

Manav Chaudhary will present: Anatomy of the Treasury Market: Who Moves Yields?

Abstract: When intermediaries such as dealers lack the balance-sheet capacity to absorb investor demand, asset prices deviate from fundamentals. Arbitrage spreads (e.g., Treasury-OIS spreads) are widely used to diagnose such distortions, yet it is the price level (e.g., Treasury yields) that ultimately governs borrowing costs and monetary policy transmission. We study to what extent spreads reflect distortions that matter for price levels. We develop a model where intermediaries face two costs: one proportional to portfolio risk, another tied to gross position size. While gross position costs predominantly drive spread distortions, risk costs primarily drive price-level distortions. The theory delivers a sufficient statistic: differences in the rate at which price levels and spreads revert after a demand shock separately identify these costs. We apply this framework to U.S. Treasury and OIS markets using high-frequency demand shocks identified from Treasury auctions. Risk costs dominate on average: demand shocks move yields substantially while leaving spreads largely unchanged. A calibrated model reinforces the disconnect: relaxing position costs such as the supplementary leverage ratio sharply reduces spread volatility with little effect on yield volatility, while easing risk-based costs does the reverse. Overall, spreads alone miss the dominant source of price-level distortions.