Does Liquidity Management Induce Fragility in Treasury Prices? Evidence from Bond Mutual Funds

• 成果类型: Article
• 署名作者: Huang, Shiyang; Jiang, Wenxi; Liu, Xiaoxi; Liu, Xin
• 署名单位: University of Hong Kong; Chinese University of Hong Kong; Bank for International Settlements (BIS); University of Macau
• 刊物名称: REVIEW OF FINANCIAL STUDIES
• ISSN/ISSBN: 0893-9454
• DOI: 10.1093/rfs/hhae082
• 发表日期: 2024
• 页码: 337
• 关键词: cross-section; illiquidity; returns; CRISIS; RISK

摘要

Mutual funds investing in illiquid corporate bonds actively manage Treasury positions to buffer redemption shocks. This liquidity management practice can transmit non-fundamental fund flow shocks onto Treasuries, generating excess return volatility. Consistent with this hypothesis, we find that Treasury excess return volatility is positively associated with bond fund ownership, and this pattern is more pronounced among funds conducting intensive liquidity management. Causal evidence is provided by exploiting the U.S. Securities and Exchange Commission's 2017 Liquidity Risk Management Rule. Evidence also suggests that the COVID-19 Treasury market turmoil was attributed to intensified liquidity management, an unintended consequence of the 2017 Liquidity Risk Management Rule.