Government bonds are supposed to be the simplest instruments in finance — risk-free, liquid, priced by macroeconomic fundamentals. Bond yields should reflect interest rate expectations and term premia. Deviations from this should be small and transient.
Canon, Gerba, and Barunik show they are not. Using proprietary data on gilt-backed repo transactions, they decompose bond yield deviations into two sources: market power effects from individual dealers (0.5 to 1.3 percentage points) and shock transmission between dealers through their network connections (2 to 4 percentage points). The network effect is two to four times larger than the direct market power effect. Bond mispricing is not primarily about any single dealer's dominance. It is about how shocks propagate through the dealer network.
The mechanism: repo dealers fund bond positions through short-term borrowing from each other. When one dealer faces a funding shock, it adjusts repo rates, which changes the funding costs for connected dealers, who adjust their own positions, which affects bond prices. The heterogeneity in how long these shocks persist across different dealers amplifies the aggregate effect. A shock that dies quickly in one dealer but lingers in another creates a persistent pricing distortion that neither dealer alone would produce.
The through-claim is about where mispricing lives. The intuition says market power drives mispricing — a dominant dealer pushes prices away from fundamentals. The data says interconnection drives it more. The mispricing is not in the node but in the edge. The network structure that connects dealers, not the market share of any individual dealer, is the primary source of yield deviation. David becomes Goliath not by growing larger but by being connected.