Diminishing Treasury Convenience Premiums: Effects of Dealers' Excess Demand in Auctions

66 Pages Posted: 13 Apr 2020 Last revised: 24 Oct 2020

See all articles by Sven Klingler

Sven Klingler

BI Norwegian Business School

Suresh M. Sundaresan

Columbia Business School - Finance and Economics

Date Written: March 18, 2020

Abstract

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. Moreover, increases in market uncertainty (measured by VIX), increase Treasury yields instead of triggering flights to safety. We show that the falling excess demand of primary dealers in Treasury auctions and their increased balance sheet constraints post-2015, are the key variables in explaining these patterns. Even after accounting for Treasury supply, levels of interest rates, and other controls, primary dealers' excess demand and balance sheet constraints are the main drivers of Treasury yields and spreads.

Keywords: Convenience premium, Treasury auctions, tender-cover ratios, primary dealers, risk-free rates, OIS, VIX

JEL Classification: D44, D53, G12, G14

Suggested Citation

Klingler, Sven and Sundaresan, Suresh M., Diminishing Treasury Convenience Premiums: Effects of Dealers' Excess Demand in Auctions (March 18, 2020). Available at SSRN: https://ssrn.com/abstract=3556502 or http://dx.doi.org/10.2139/ssrn.3556502

Sven Klingler (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Suresh M. Sundaresan

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
212-854-4423 (Phone)
212-316-9180 (Fax)

HOME PAGE: http://www0.gsb.columbia.edu/faculty/ssundaresan/

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