Salomon took bonds, stripped them, and called them CATS/TRs. Now they want to buy these bonds back from people who have them and reassemble the bonds to sell them to dealers at a profit (due to a shortage in the bond market). Many dealers took short positions and failed because rates dropped so prices rose, now need to buy back bonds at higher prices Shortage of bonds in market is driving prices even higherSalomon wants to profit from the high prices on bonds bc of shortageMake strips to- buy treasury bills strip them into their individual payments and sell them. Salomon bought treasuries, and issued CLAIMS on the pieces – they did this differently, why? Because they weren’t allowed to strip. Price of the securities is now higher than price of strips bc of the squeeze and people needing to buy them because of short positions.
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Interest rates on government securities is the “Risk free rate” – the benchmark against which all other interest rates are measuredDealers large enough to be “recognized” by the Fed as potential trading partners are primary dealer, the rest are known as secondary dealers.Secondary’s buy from the primaries to sell to the publicUnlike dealers, brokers never take a position in securities- role is merely to bring together buyers and sellers Market for gov. securities is over the counter rather than exchange so it’s harder for participants to know what is going onSecurities dealer:Unlike bank no contract or permission required
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