Working Paper: NBER ID: w31863
Authors: Viral V. 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; US Treasuries; Hedging; Inflation Expectations; Stock-Bond Covariance
JEL Codes: E4; E5; F3; G11; G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Covariance of treasury returns with stock market returns (G12) | Convenience yield of US Treasuries (E43) |
| Heightened inflation expectations (E31) | Convenience yield of US Treasuries (E43) |
| Increased treasury supply (H63) | Convenience yield of US Treasuries (E43) |
| Fluctuations in the convenience yield (E39) | Changes in stock-bond covariance (G17) |
| One standard deviation decrease in stock-bond covariance (C10) | Six basis point increase in convenience yield (E43) |