The Benchmark U.S. Treasury Market: Recent Performance and ...

Michael J. Fleming
The Benchmark U.S. Treasury
Market: Recent Performance
and Possible Alternatives
he U.S. Treasury securities market is a benchmark. As crisis in the fall of 1998 in a so called “flight to quality.” A
obligations of the U.S. government, Treasury securities are related “flight to liquidity” also caused yield spreads among T
considered to be free of default risk. The market is therefore a Treasury securities of varying liquidity to widen sharply.
benchmark for risk free interest rates, which are used to Consequently, some of the attributes that make the Treasury
forecast economic developments and to analyze securities in market an attractive benchmark were adversely affected.
other markets that contain default risk. The Treasury market is This paper examines the benchmark role of the U.S.
also large and liquid, with active repurchase agreement (repo) Treasury market and the features that make it an attractive
and futures markets. These features make it a popular benchmark. In it, I examine the market’s recent performance,
benchmark for pricing other fixed income securities and for including yield changes relative to other fixed income markets,
hedging positions taken in other markets. changes in liquidity, repo market developments, and the
The Treasury market’s benchmark status, however, is now aforementioned flight to liquidity. I show that several of the
being called into question by the nation’s improved fiscal attributes that make the U.S. ...