Learning from Holdings: Drivers of Convenience Yield and Policy Implications

Abstract

The spread between corporate and sovereign bond yields cannot be explained by differences in default risk alone. Instead, there is a significant non-default component that has traditionally been associated with the "convenience'' of holding a particular asset. We use comprehensive portfolio holdings data from the euro area corporate bond market to shed light on the drivers of such convenience yields. We document significant variation in convenience yields across different investor group portfolios. Taking the business models of different sectors (banks, mutual funds, and insurance companies) into account, we conduct several regulatory and monetary policy event studies to map variation in convenience yields to specific service flows. We find that liquidity, regulatory capital requirements, and collateral pledgeability are all important determinants of convenience yields. Our results underscore the importance of asset-specific services in driving bond valuation and shaping monetary policy transmission.

Keywords: Convenience yields, Quantitative Easing, Corporate Bonds

JEL Classification: G10, G12, G32