Reaching for Duration and Leverage in the Treasury Market

85 Pages Posted: 7 May 2024 Last revised: 28 May 2024

See all articles by Daniel Barth

Daniel Barth

Board of Governors of the Federal Reserve System

R. Jay Kahn

Board of Governors of the Federal Reserve System

Phillip Monin

Board of Governors of the Federal Reserve System

Oleg Sokolinskiy

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: May 3, 2024

Abstract

We show substantial variation in mutual funds' use of Treasury futures, both over time and across funds. This variation from mutual funds drives much of the time series variation in aggregate Treasury futures open interest, including over 60% of the recent rise in Treasury futures positions. We provide evidence these Treasury futures positions are largely attributable to mutual funds "reaching for duration" in order to track the duration of a benchmark index with high cash Treasury exposure. Specifically, we show mutual funds use futures to fill the gap between their portfolio and the index that results when they tilt their cash positions toward higher return but lower duration assets, such as mortgage-backed securities and equities, and away from cash Treasuries. Treasury futures positions are more common in mutual funds which indicate a focus on dual objectives of duration management and total return whose style has a higher allocation to Treasuries. Reaching for duration allows funds to track their index better at lower cost, but increases leverage in the Treasury market both through mutual funds long Treasury futures positions and through the leverage of hedge funds who take the corresponding short positions in Treasury futures.

Keywords: Treasury markets, mutual funds, duration, indexing, futures, mortgage-backed securities

JEL Classification: G11, G12, G13, G23

Suggested Citation

Barth, Daniel and Kahn, R. Jay and Monin, Phillip and Sokolinskiy, Oleg, Reaching for Duration and Leverage in the Treasury Market (May 3, 2024). Available at SSRN: https://ssrn.com/abstract=4816018 or http://dx.doi.org/10.2139/ssrn.4816018

Daniel Barth

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

R. Jay Kahn (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Phillip Monin

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Oleg Sokolinskiy

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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