Foreign Safe Asset Demand for U.S. Treasurys and the Dollar

55 Pages Posted: 11 Dec 2017 Last revised: 25 Mar 2018

See all articles by Zhengyang Jiang

Zhengyang Jiang

Kellogg School of Management - Department of Finance

Arvind Krishnamurthy

Stanford Graduate School of Business

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Date Written: March 15, 2018

Abstract

The convenience yield that foreign investors derive from holding U.S. Treasurys causes a failure of Covered Interest Rate Parity by driving a wedge between the yield on the foreign bonds and the currency-hedged yield on the U.S. Treasury bonds. Even before the 2007-2009 financial crisis, the Treasury-based dollar basis is negative and occasionally large. We use the Treasury basis as a measure of the foreign convenience yield. Consistent with the theory, an increase in the convenience yield that foreign investors impute to U.S. Treasurys coincides with an immediate appreciation of the dollar, but predicts future depreciation of the dollar. The Treasury basis variation accounts for up to 25% of the quarterly variation in the dollar between 1988 and 2017.

Keywords: Covered Interest Rate Parity, exchange rates, safe asset demand, convenience yields

JEL Classification: F31

Suggested Citation

Jiang, Zhengyang and Krishnamurthy, Arvind and Lustig, Hanno N., Foreign Safe Asset Demand for U.S. Treasurys and the Dollar (March 15, 2018). American Economic Review P&P, Forthcoming; Stanford University Graduate School of Business Research Paper No. 18-1. Available at SSRN: https://ssrn.com/abstract=3082668 or http://dx.doi.org/10.2139/ssrn.3082668

Zhengyang Jiang

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

HOME PAGE: http://https://sites.google.com/site/jayzedwye/

Arvind Krishnamurthy

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Hanno N. Lustig (Contact Author)

Stanford Graduate School of Business ( email )

Stanford GSB
655 Knight Way
Stanford, CA California 94305-6072
United States
3108716532 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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