The Treasury Collateral Spread and Levered Safe-Asset Production

Banks are vital suppliers of money-like safe assets, which they produce by issuing short-term liabilities and pledging collateral. But their ability to create safe assets varies over time as leverage constraints fluctuate. I write a simple model to describe private safe-asset production when intermediaries face leverage constraints. I directly measure leverage constraints using confidential supervisory data on high-frequency changes in the largest banks’ repurchase agreements (repos). The collateral spread—the maturity-matched yield spread between Treasuries used as repo collateral more often and Treasuries used less often—compensates for bank leverage risk and averages about 0.5 basis points, a sizable magnitude roughly equal to 60% of the five-year Treasury cheapest-to-deliver basis. This paper was accepted by Bo Becker, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.06104 .