Diminishing Treasury Convenience Premiums: Effects of Dealers' Excess Demand in Auctions
66 Pages Posted: 13 Apr 2020 Last revised: 24 Oct 2020
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. 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: Suggested Citation