When do Treasuries Earn the Convenience Yield? — A Hedging Perspective /
Viral V. Acharya, Toomas Laarits.
- Cambridge, Mass. National Bureau of Economic Research 2023.
- 1 online resource: illustrations (black and white);
- NBER working paper series no. w31863 .
- Working Paper Series (National Bureau of Economic Research) no. w31863. .
November 2023.
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.
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