Bond markets and central banks

This event is part of the virtual 20th Annual Conference webinars and panel discussions that were livestreamed on our website from 23 to 28 June.

Abstract

In her webinar, Professor Vissing-Jørgensen presented her paper "The Treasury market in spring 2020 and the response of the Federal Reserve".

This paper studies Treasury market dislocations during the initial phase of the Covid-19 crisis in March 2020. Despite a deteriorating economy, the 10-year yield increased by 64 bps from 9 to 18 March. This was not due to higher expected inflation or increased default risk for government debt. In response, the Federal Reserve purchased over $1T of Treasuries in the first quarter of 2020, more than in either of the QE1, QE2, or QE3 programmes.

Ms Vissing-Jørgensen argues that Fed purchases were causal for driving down yields by documenting the timing of Fed purchases (which were increased sharply on 19 March, the same day the yield spike started to reverse) and the timing of yield reversals and Fed purchases in the mortgage-backed security (MBS) market, as well as by providing evidence against confounding factors. The Fed's "market-functioning" QE during Covid-19 appears to have worked more via purchase effects than announcement effects, in contrast to earlier QE programmes and in contrast to corporate bond purchases during the Covid-19 crisis.

Ms Vissing-Jørgensen proposes that the importance of purchase effects for market-functioning QE is due to the Treasury yield spike being driven by immediate liquidity needs that were unaffected by the initial Treasury purchase announcement on 15 March. She documents that the main sellers of Treasuries were mutual funds, foreign official agencies, and hedge funds, and argues that urgent liquidity needs were relevant for sellers within these sectors.

About the speaker

Annette Vissing-Jørgensen 
Professor, Arno A Rayner Chair in Finance and Management and Chair of the Finance Group, Haas School of Business, University of California Berkeley

 Professor Vissing-Jorgensen holds a PhD from MIT. Her research focuses on monetary policy and empirical asset pricing. Her work has been published in leading economics and finance journals (Journal of Political Economy, American Economic Review, Quarterly Journal of Economics, Journal of Finance, Journal of Financial Economics and Review of Financial Studies). She is a member of the American Academy of Arts and Sciences, has served as a director of the American Finance Association and the European Finance Association, and as Academic Adviser to Sveriges Riksbank.

About the discussant

Andrew Metrick
Janet L Yellen Professor of Finance and Management, Yale School of Management (SOM); the Director of the Yale Program on Financial Stability.

Andrew Metrick earned a PhD in economics from Harvard in 1994, and a BA in economics and mathematics from Yale in 1989. Prior to joining the Yale faculty in 2008, he held positions in the finance department at Wharton and the economics department at Harvard. In academic year 2009–10, he was on leave at the Council of Economic Advisers in Washington. Upon returning to Yale, he served as the Deputy Dean of SOM from 2010 to 2016. Professor Metrick's current research and teaching is focused on financial stability, including the regulation of systemic risk, the activities of complex financial institutions, and the causes and consequences of the financial crisis of 2007–09.