Working Paper: CEPR ID: DP18584
Authors: Viral Acharya; Toomas Laarits
Abstract: We document that the convenience yield of U.S. Treasuries exhibits properties that are consistent with a hedging perspective of safe assets. The convenience yield tends to be low when the covariance of Treasury returns with the aggregate stock market returns is high. A decomposition of the aggregate stock-bond covariance into terms corresponding to the convenience yield, the frictionless risk-free rate, and default risk reveals that the covariance between stock returns and the convenience yield itself drives the effect in a substantive capacity. We show the convenience yield is reduced with heightened inflation expectations that erode the hedging properties of U.S. Treasuries and other fixed-income money-like assets, inducing a switch to alternatives such as gold; it is also reduced immediately prior to debt-ceiling standoffs and with increases in Treasury supply.
Keywords: convenience yield; U.S. Treasuries; hedging perspective; inflation expectations; debt ceiling
JEL Codes: G11; G12; G15; E4; E5; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| convenience yield of U.S. Treasuries (E43) | covariance of Treasury returns with stock market returns (G12) |
| covariance of Treasury returns with stock market returns (G12) | convenience yield of U.S. Treasuries (E43) |
| inflation expectations (E31) | convenience yield of U.S. Treasuries (E43) |
| Treasury supply (H63) | convenience yield of U.S. Treasuries (E43) |
| one standard deviation decrease in stock-bond covariance (C10) | increase of six basis points in convenience yield of the 10-year nominal Treasury (E43) |