Monday, June 15, 2009

treasury bills in bank secondary reserves

Bills have ready market ability and,because of their narrow bid-asked trading spreads, can usually be sold without any loss even if held only a short time.As a rule, the higher the yield of bill at purchase, or the shorter the maturity of the bill at purchase,the wider can be the subsequent market fluctuation over a given period without the bank that sells the bill incurring a loss on the transaction. the greater safety from possible adverse market fluctuations in price that treasury bills give the bank holding them helps account for the popularity of Treasury bills give the bank holding them helps account for the popularity of treasury bills as a major component of bank secondary reserves. the greater trading activity in the short end of the government securities market, as compared with the long end of this market, also means that bills can readily be marked at any time.
other secondary reserves addition to treasury bills and other short-term treasury obligations, it is possible for commercial bank to use federal Agency issues, public housing Authority notes, banker's acceptances, and commercial paper in its secondary reserves. these other money market assets do not ave quite as much shiftability as do treasury bills, though they usually have higher yields than treasury bills. the reduced shiftability of these assets, however, makes them attractive only if seasonal, or other, liquidity requirements can be forecast with some degree of accuracy. there may be more reluctance to sell such other secondary reserve assets freely, because the spreads between the bid and asked prices on marketable agency issues and the Housing Authority notes, to take two example, are both wider than is true for Treasury bills. there is thus somewhat more market risk for these other money market assets.

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