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treasury fails

Ramon P. Deg...1 and James T. Moser2

(1)  Department of Finance, The University of Tennessee, 37996 Knoxville, Tennessee, USA
(2)  Research Department, Federal Reserve Bank of Chicago, 230 South LaSalle, 60690 Chicago, Illinois, USA
Abstract  If the seller of a Treasury bill does not provide timely and correct delivery instructions to the clearing bank, the bank does not deliver the security. Furthermore, the seller is not paid until this failed delivery is rectified. Since the purchase price is not changed, these fails generate interest-free loans from the seller to the buyer. This article studies the effect of failed delivery on Treasury bill prices. We find that investors bid prices to a premium to reflect the possibility of obtaining the interest-free loans that fails represent. This premium is a function of the opportunity cost of the fail. We also find that the bid-ask spread varies directly with the length of the fail. We rule out that our results are due to liquidity premiums, or to a general weekly pattern in short-term interest rates or the bid-ask spread.