The Effect of Primary Dealer Constraints on Intermediation in the Treasury Market

Using confidential microdata, we show that shocks to primary dealers’ constraints have significant effects on the U.S. Treasury securities market. We consider two types of constraints: the supplementary leverage ratio and trading desk value-at-risk constraints. In response to tighter constraints, dealers reduce their Treasury positions, triggering a reduction in aggregate turnover and an increase in dealer intermediation margin. Impaired intermediation also amplifies the yield response to net demand shifts and weakens Treasury auction outcomes. Our estimates suggest that the (shadow) cost of dealer constraints is as high as 9% of dealers’ profit margins.