Learning from Holdings: Drivers of Convenience Yield and Policy Implications

100 Pages Posted: 27 Dec 2023 Last revised: 28 Oct 2024

See all articles by Felix Corell

Felix Corell

VU University Amsterdam

Lira Mota

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Melina Papoutsi

European Central Bank (ECB) - Directorate General Research

Date Written: September 19, 2023

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

Suggested Citation

Corell, Felix and Mota, Lira and Papoutsi, Melina, Learning from Holdings: Drivers of Convenience Yield and Policy Implications (September 19, 2023). Available at SSRN: https://ssrn.com/abstract=4656963

Felix Corell

VU University Amsterdam ( email )

Netherlands

Lira Mota (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Melina Papoutsi

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

HOME PAGE: http://https://www.melinapapoutsi.com/

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