US Rates Strategy: Intraday Buyback Effect

Research evidence excerpt

US Rates Strategy: Intraday Buyback Effect

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Exhibit 1: Buyback ratio versus offer-to-maximum Exhibit 2: Share of auctioned duration risk bought

multiple by curve sector back through liquidity support operations

Buyback ratio %

16 1.0

0.9 14

0.8

0.7

0.6 10

0.5

0.4

0.3 6

0.2

0.1

0.0 2

0.0 2.5 5.0 7.5 10.0 12.5 15.0 17.5 20.0

Offer to Maximum 0

Front-end Belly Back-end TIPS 2Y 3Y 5Y 7Y 10Y 20Y 30Y

Source: US Treasury, Morgan Stanley Research Source: US Treasury, Morgan Stanley Desk estimates, Morgan Stanley Research

Buyback sizes are large in absolute terms, and each operation also tends to be

concentrated in a few CUSIPs.

• This is particularly true beyond the 5y-7y sector, with 10y-20y buybacks the most

concentrated, see Exhibit 3 .

Given that buybacks add demand for meaningful amounts of risk in concentrated off-the-

run CUSIPs, they should affect the liquidity of the bonds involved.

• In the rest of this piece, we investigate how buyback events affect bonds in the

target sector.

° We focus on relative yield performance, as additional demand should reduce

illiquidity premiums, and on bid-ask spreads, as improved liquidity should

lower transaction costs.

• Exhibit 4 shows the timeline of a single buyback operation. The process works as

follows:

° In its quarterly refunding documents, the Treasury releases the buyback

schedule for the upcoming quarter.

° At 11:00am ET on the day before a buyback, the Treasury releases a

preliminary list of CUSIPs within the buyback window that are eligible to be

accepted in the operation.

° At 11:00am ET on the operation date, the Treasury releases a finalized version

of the list, usually with few changes.

° The Treasury then accepts offers from participants in those CUSIPs from

1:40pm to 2:00pm ET on the operation date.