Diminishing Treasury Convenience Premiums: Effects of Dealers' Excess Demand in Auctions
62 Pages Posted: 10 Mar 2022
Date Written: March 18, 2020
After the global financial crisis, the yields of U.S. Treasury bills frequently exceed other risk-free rate benchmarks, thereby pointing to a diminishing convenience premium. Constructing a new measure of dealers' balance sheet constraints for providing intermediation in U.S. Treasury markets, we trace these diminishing convenience premiums to primary dealers' ability to act as intermediaries. Even after accounting for Treasury supply, levels of interest rates, and other controls, falling excess demand of primary dealers in Treasury auctions, their increased Treasury holdings, and balance sheet constraints post-2015, remain key variables in explaining the diminishing convenience premiums.
Keywords: Convenience premium, Treasury auctions, tender-cover ratios, primary dealers, risk-free rates, OIS, VIX
JEL Classification: D44, D53, G12, G14
Suggested Citation: Suggested Citation