Investing in Safety

Abstract

We offer an investor-based perspective on the demand for safe assets and the determination of convenience yields. Using proprietary securities holdings data, we characterize the investor base of both national and supranational safe assets in Europe. To determine who the marginal investor is, we exploit the largest ever joint issuance of supranational bonds by the European Commission to link how different investors rebalance their portfolios following this large shock to the supply of safe assets. We show that, for the same security, the marginal investors in supranational bonds are mutual funds and banks. These investors view the AAA-rated Commission bonds as substitutes for other supranational bonds. To study portfolio re-balancing of investors we construct an instrument based on their ex-ante propensity to hold other supranational bonds. We show that when they acquire Commission bonds, they re-balance away from other supranational bonds and, as a result, the yields on those bonds increase. However, investors do not view the Commission bonds as substitutes for national government bonds. We show that this result is driven by the domestic investors who do not substitute away from national bonds following the Commission bond issuance. Such home bias of domestic investors towards national bonds may help explain why the AAA-rated Commission bonds have substantially higher yields compared to national government AAA-rated securities.