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Treasury Market, Microstructure of the U.S.

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Encyclopedia of Complexity and Systems Science

Definition of the Subject

This article discusses the microstructure of the US Treasury securities market.

US Treasury securities are default risk free debt instruments issued by the US government. These securities play an important, even unique, role ininternational financial markets because of their safety, liquidity, and low transactions costs. Treasury instruments are often the preferred safe havenduring financial crises, a process often referred to as a “flight to quality”.

According to the US Treasury, there was more than \( { \$ }\)9 trillion in US government debt outstanding as of August 31, 2007. Of this quantity, the publicholds more than \( { \$ } \)5 trillion and\( { \$ } \)4.5 trillion is tradable onfinancial markets. Foreigners hold approximately \( { \$ }\)2.4 trillion of the marketable supply, with Japan and China together holding more than \( { \$ } \)1 trillion. According to the Securities Industryand Financial Markets Association (SIFMA), average daily trading volume...

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Abbreviations

Algorithmic trading:

Algorithmic trading is the practice of automatically transacting based on a quantitative model.

Broker:

A broker is a firm that matches buyers and sellers in financial transactions. An interdealer broker (IDB) is an intermediary providing trading services to hedge funds, institutions, and other dealers. IDB's handle the majority of Treasury securities transactions in the secondary market.

Coupons:

Owners of Treasury notes and bonds receive periodic payments called coupons. They are fixed by the Treasury at auction and are typically paid semi‐annually.

Depth:

Depth is the quantity the dealer is willing to sell at the bid or offer.

Electronic communications networks (ECN):

The Securities and Exchange Commission defines electronic communications networks (ECNs) as “electronic trading systems that automatically match buy and sell orders at specified prices”.

Market microstructure :

Market microstructure is a field of economics that studies the price formation process and trading procedures in security markets.

On-the-run:

On-the-run refers to the most recently auctioned Treasury security of a particular maturity. After the next auction, the security goes off-the-run.

Price discovery:

The process by which prices adapt to new information.

Primary dealers:

Primary dealers are large brokerage firms and investment banks that are permitted to trade directly with the Federal Reserve in exchange for making markets in Treasuries. They provide the majority of liquidity in the Treasury market, participate in Treasury auctions, and provide information to assist the Fed in implementing open market operations.

Secondary market:

After the initial auction of Treasury instruments, trading in on-the-run and off-the-run securities makes up the secondary Treasury market.

When issued:

When‐issued bonds are those Treasuries whose auctions have been announced but have not yet settled.

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Author information

Authors and Affiliations

  1. Department of Economics, Rutgers University, New Brunswick, USA

    Bruce Mizrach

  2. Research Department, Federal Reserve Bank of St. Louis, St. Louis, USA

    Christopher J. Neely

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  1. Bruce Mizrach
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  1. RAMTECH LIMITED, 122 Escalle Lane, Larkspur, CA, 94939, USA

    Robert A. Meyers Ph. D. (Editor-in-Chief) (Editor-in-Chief)

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Mizrach, B., Neely, C.J. (2009). Treasury Market, Microstructure of the U.S.. In: Meyers, R. (eds) Encyclopedia of Complexity and Systems Science. Springer, New York, NY. https://doi.org/10.1007/978-0-387-30440-3_566

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