Working Paper: NBER ID: w23759
Authors: Wenxin Du; Joanne Im; Jesse Schreger
Abstract: We quantify the difference in the convenience yield of U.S. Treasuries and the bonds of near default-free sovereigns by measuring the gap between the FX swap-implied dollar yield paid by foreign governments and the U.S. Treasury dollar yield. We call this wedge the “U.S. Treasury Premium.” We find that this premium was approximately 21 basis points for five-year bonds prior to the Global Financial Crisis, increased up to 90 basis points during the crisis, and has disappeared since the crisis with the post-crisis mean at -8 basis points. We show the decline in the premium cannot be explained away by credit risk or FX swap market mispricings. In addition, we present evidence that the relative supply of government bonds in the United States and foreign countries affects the premium.
Keywords: US Treasury Premium; Convenience Yield; Sovereign Bonds
JEL Codes: E4; F30; G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US Treasury premium (H63) | convenience yield (D11) |
| sovereign credit risk differential (F34) | US Treasury premium (H63) |
| swap market mispricing (G10) | US Treasury premium (H63) |
| differences in liquidity (E41) | US Treasury premium (H63) |
| relative bond supply (E43) | US Treasury premium (H63) |
| liquidity component (G33) | US Treasury premium (H63) |
| US repo-treasury bill spread (E43) | average three-month premium of US Treasury bills (E43) |
| US Treasury premium (H63) | loss of 'specialness' of US Treasuries (E43) |