THE US TREASURY MARKET IN AUGUST 1998: UNTANGLING THE EFFECTS OG HONG KONG AND RUSSIA WITH HIGH FREQUENCY DATA

The second half of AUgust 1998 was dominated by two events. From 14 to 28 August the Hong Kong Monetary Authority (HKMA) intervened in the Hong Kong equity markets to prevent a speculative double play against their currency board. On 17 August Russia announced its default on sovereign bonds. This paper demonstrates that the HKMA interventions had a substantial impact on the outcomes for US Treasury markets during this period. Using a careful analysis of high frequency bond market data both events are shown to intersect in the US Treasury market, despite having originated from seemingly unrelated shocks. On this evidence the shocks emanating from Hong Kong were important for the US Treasury market. The lesson for policy makers is that major markets play an important role in transmitting and absorbing the effects of unrelated shocks.