Testing the Liquidity Support Effects of the U.S. Treasury Buyback Program

IMF Working Papers, May 9, 2025

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Paper examines the U.S. Treasury’s recently introduced liquidity support buyback program as a natural experiment to evaluate whether regular mechanisms for selling less liquid off-the-run Treasury securities can enhance market liquidity.
Objective: present a direct test of the buyback mechanism and quantify liquidity support effects at both the individual security level and the aggregate balance sheet level of primary dealers.
Author and date: By Jing Zhou, May 9, 2025.

Constructs an instrumental variable for the Treasury’s buyback selection decisions based on operational considerations that are independent of securities’ liquidity conditions.
Key instrument: whether a security matures in a month characterized by significant cash inflows to the Treasury (used to predict Treasury buyback selection).
Empirical analysis assesses effects on bid-ask spreads, off-the-run spreads, security prices, and primary dealers’ net holdings of Treasury bills and coupons.

Buybacks moderately narrow bid-ask spreads.
Buybacks moderately narrow off-the-run spreads.
Buybacks raise prices for securities listed by buyback.
Prices are further boosted for securities actually purchased in buybacks.
Buybacks reduce primary dealers’ net holdings of Treasury bills and coupons.
Liquidity support effects are particularly pronounced when dealers hold large Treasury inventories.

Findings are rationalized using a model in which buybacks serve as predictable demand for dealers facing inventory constraints and holding costs.
Under this model, predictable buyback demand mitigates illiquidity risks for dealers by alleviating inventory pressures and holding-cost-driven constraints.

Subject areas: Asset and liability management; Financial institutions; Financial statements; Government cash management; Liquidity; Public financial management (PFM); Securities; Treasury bills and bonds.
Keywords: buyback securities; buyback selection decision; Financial statements; Government cash management; introduced liquidity support buyback program; Liquidity; Liquidity support; off-the-run Treasury securities; Primary dealers; Securities; Treasury bills and bonds; Treasury buyback program; Treasury buybacks; Treasury market.