Liquidity in strongUstrong.S. Treasury spot and futures markets - bis.org.pdfVIP

Liquidity in U.S. Treasury spot and futures markets Michael Fleming and Asani Sarkar* Federal Reserve Bank of New York 33 Liberty Street New York, NY 10045 (212) 720-6372 (Fleming) (212) 720-8943 (Sarkar) michael.fleming@ny.frb.org asani.sarkar@ny.frb.org Abstract We estimate various measures of market liquidity for U.S. Treasury spot and futures markets for 1993. We find that, for both spot and futures markets, trading is concentrated in the nearby expiration/on- the-run instrument and in specific maturitieslonger maturities for the futures, and shorter maturities for the spot. The median realized bid-ask spread is uniformly lower for the futures market than in the spot market. * Views expressed are those of the authors and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System. 1. Introduction The Treasury market transacts the debt of the U.S. government. The size of the market corresponds roughly to the outstanding U.S. federal debt, the majority of which consists of marketable securities – Treasury bills, notes, and bonds. Treasury bills have maturities of one year or less, while notes and bonds have maturities of more than one year. Once Treasury securities are issued, they trade in the secondary market, where dealers trade for customers or their own accounts by quoting bids and offers. In addition, investors can also buy and sell Treasury futures, which are standardised contracts traded on organised exchanges. Since Treasury futures can be used to lock in an int