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The U.S. Treasury Buyback Auctions: The Cost of Retiring Illiquid Bonds





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    • Han is with the McCombs School of Business at the University of Texas at Austin. Longstaff is with the UCLA Anderson School and the National Bureau of Economic Research. Merrill is with the Marriott School of Management at Brigham Young University and is a Fellow of the Wharton Financial Institutions Center. We are grateful for valuable comments and assistance from Tony Bernardo, Sushil Bikhchandani, David Hirshleifer, Andrew Karolyi, Val Lambson, Grant McQueen, Brett Myers, Kjell Nyborg, and Ross Valkanov. We are particularly grateful for the very helpful comments of Rob Stambaugh (the editor) and an anonymous referee. All errors are our responsibility.


We study an important recent series of buyback auctions conducted by the U.S. Treasury in retiring $67.5 billion of its illiquid off-the-run debt. The Treasury was successful in buying back large amounts of illiquid debt while suffering only a small market-impact cost. The Treasury included the most-illiquid bonds more frequently in the auctions, but tended to buy back the least-illiquid of these bonds. Although the Treasury had the option to cherry pick from among the bonds offered, we find that the Treasury was actually penalized for being spread too thinly in the buybacks.