Bond Losses in Post‐Auction Resale Markets : Causes and Consequences

Barbosa, Klenio and De Silva, Dakshina G. and Yang, Liyu and Yoshimoto, Hisayuki (2024) Bond Losses in Post‐Auction Resale Markets : Causes and Consequences. International Journal of Finance and Economics. ISSN 1076-9307

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Abstract

This paper examines the primary-dealers' returns in post-auction resale markets for treasury bonds, assesses the prevalence of losses and gains and their consequences for the financial sector. Using a novel database that tracks more than 2350 primary-to-secondary transactions, we find that bond losses for primary-dealers are pervasive and were severe during the financial crisis. Our results indicate that liquidity constraint is a major source of the bond losses. We also find that financial sector value is correlated with these losses. Using an alternating market experiment, we show that primary-to-secondary losses are higher under discriminatory auctions as compared to uniform auctions.