Learning About Convenience Yield from Holdings

Abstract

Investors value financial assets for both cash flows and services like liquidity and regulatory benefits. The value of these services is typically measured as a convenience yieldthe yield spread between assets with similar cash flows. However, convenience yields are residual measures that reveal little about the underlying drivers of this price gap. Using comprehensive bond characteristics and portfolio holdings data on corporate and sovereign bonds in the euro area, we decompose EU AAA sovereign bond convenience yields into liquidity, duration, risk-based capital value, and collateral components. Our findings show that over the past decade, convenience yields have been primarily driven by insurance companies and pension funds' preference for bonds with low risk-based capital requirements and high duration-characteristics that help these institutions meet regulatory obligations. Policyinduced shocks to these services significantly impact asset prices and portfolio allocations. These results highlight the importance of asset-specific service flows in bond valuation and monetary policy transmission.

Keywords: Corporate Bonds, Convenience yield, Quantitative Easing, Monetary Policy

JEL Classification: G10, G12, G32