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

_IMF Working Papers, May 9, 2025_

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## Bibliographic details
- Authors: Jing Zhou
- Published: May 9, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229008099.001

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### Overview
- 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.

### Methodology
- 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.

### Key findings
- 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.

### Mechanism and interpretation
- 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 coverage and keywords
- 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.

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_Source: https://www.imf.org/en/publications/wp/issues/2025/05/09/testing-the-liquidity-support-effects-of-the-u-s-566801_