The “Flow Effect” vs “Stock Effect”

Everything you wanted to know and more including some decent charts FROM THE FEDERAL RESERVE on their buying OF USTs. Suppose what we like MOST about this is that it is straight FROM the horses mouth. Think 3-4bps shift on the days OF a purchase in any specific UST sector AND 50bps shift in the curve. To reiterate, we’re NOT talking flows of funds into/out of stocks or allocation trade that may or may NOT have taken place earlier today, as you might have thought based on the title. Sorry for that. We now offer you some research from the Fed

Flow And Stock Effect Of Large-Scale Treasury Purchases


Using a panel of daily CUSIP-level data, we study the effects of the Federal Reserve’s program to purchase $300 billion of U.S. Treasury coupon securities announced and implemented during 2009. This program represented an unprecedented intervention in the Treasury market and thus allows us to shed light on the price elasticities and substitutability of Treasuries, preferred-habitat theories of the term structure, and the ability of large-scale asset purchases to reduce overall yields and improve market functioning. We find that each purchase operation, on average, caused a decline in yields in the sector purchased of 3.5 basis points on the days when these purchases occurred (the “flow effect” of the program). In addition, the program as a whole resulted in a persistent downward shift in the yield curve of as much as 50 basis points (the “stock effect”), with the largest impact in the 10- to 15-year sector. The coefficient patterns generally support a view of segmentation or imperfect substitution within the Treasury market.

Scroll mouse over/click UP link above (perhaps add this to pile of weekend reading list) for 40pgs of explanations and charts … We’ll get back to watching the Dow(n) Jones work off the HOPE effect that Bob Pisani would lead us to believe was ‘in play’ early September …

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