The Impact of Government Debt on the Convenience Yield of Default-Risk-Free Debt

45 Pages Posted: 28 May 2012 Last revised: 1 Sep 2016

See all articles by Vladimir Yankov

Vladimir Yankov

Board of Governors of the Federal Reserve System

Date Written: May 28, 2012


A growing empirical literature documents that the quantity of privately held U.S. government debt affects the spreads on a wide range of fixed-income securities through determining the convenience premium placed on assets with varying degree of safety and liquidity. Shocks to the convenience premium, therefore, constitute an important source of disturbance to banks' relative cost of funds across insured and non-insured deposits. To the extent that one questions the validity of the aggregate correlations found in the literature, the liability side of FDIC insured commercial banks provides a unique laboratory for testing the impact of the public supply of safe and liquid assets on determining asset prices and allocations. Using a proprietary micro-level dataset of prices and quantities of insured and non-insured liabilities of the U.S. commercial banks, I document the heterogeneous response of banks with different capital structure in the pricing and funding choices across the two types of debt to changes in the level and maturity of government debt. The latter have larger impact on banks that have higher share of insured sources of funding. Overall, an increase in the level of government debt and shortening of its maturity have a contractionary effect on the banks' balance sheets pointing to a strong crowding out effect of government debt on the banking system capacity to attract cheap sources of funding in the form of deposits and hence its ability to extend loans.

Keywords: Asset Pricing, Money demand, Banking, Safe assets, Deposit insurance, Credit risk

JEL Classification: E4, E63, G21

Suggested Citation

Yankov, Vladimir, The Impact of Government Debt on the Convenience Yield of Default-Risk-Free Debt (May 28, 2012). Available at SSRN: or

Vladimir Yankov (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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