Entry and Exit in Treasury Auctions

Hedge funds have become increasingly active in Treasury markets, yet we have little evidence on how this shift has affected the market. We focus on the primary market, where the government issues its debt through auctions. Using over 20 years of data from Canadian Treasury auctions, we document dealers exiting and hedge funds entering. To evaluate the costs and benefits of this trend for debt issuance, we develop an auction framework with endogenous participation. We find that the expected gains from greater hedge fund participation, driven by increased competition, are smaller than the costs that arise because hedge funds—unlike dealers—do not participate regularly. Currently, dealer participation remains sufficiently strong that policies aimed at stabilizing participation have little effect on funding costs.