Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve




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    • Brandt is at the Fuqua School of Business, Duke University, and is also affiliated with the NBER. Kavajecz is at the School of Business, University of Wisconsin at Madison. For helpful comments, we thank Alessandro Beber; Roger Edelen; Michael Fleming; Clifton Green; Rick Green; Simon Gervais; Nick Souleles; Rob Stambaugh; René Stulz; Amir Yaron; an anonymous referee; and seminar participants at Arizona State University, the University of Colorado, University of Maryland, University of Pennsylvania, and Morgan Stanley Dean Witter. In addition, we thank Patricia Kelt of GovPX for explaining their data. Financial support from the Rodney L. White Center for Financial Research at the Wharton School of the University of Pennsylvania is gratefully acknowledged. All remaining errors are our own.


We examine the role of price discovery in the U.S. Treasury market through the empirical relationship between orderflow, liquidity, and the yield curve. We find that orderflow imbalances (excess buying or selling pressure) account for up to 26% of the day-to-day variation in yields on days without major macroeconomic announcements. The effect of orderflow on yields is permanent and strongest when liquidity is low. All of the evidence points toward an important role of price discovery in understanding the behavior of the yield curve.