Bond Losses in Post‐Auction Resale Markets: Causes and Consequences

Abstract

This paper examines the primary‐dealers' returns in post‐auction resale markets for treasury bonds, assesses the prevalence of losses and gains and their consequences for the financial sector. Using a novel database that tracks more than 2350 primary‐to‐secondary transactions, we find that bond losses for primary‐dealers are pervasive and were severe during the financial crisis. Our results indicate that liquidity constraint is a major source of the bond losses. We also find that financial sector value is correlated with these losses. Using an alternating market experiment, we show that primary‐to‐secondary losses are higher under discriminatory auctions as compared to uniform auctions.