Convenience Lost

Abstract

We show that long-term Treasury's convenience yields are substantially more sensitive to changes in Treasury supply than short-term Treasury's convenience yields. The fiscal expansion in the past two decades and the resultant increase in Treasury supply depressed convenience yields heterogeneously across maturities-driving them to zero for short-term Treasurys and into negative territory for long-term Treasurys. As a result, the seigniorage revenue earned by the U.S. for issuing safe and liquid assets declined. Although the U.S. Treasury shortened its debt maturity structure in recent years, we show this adjustment is unable to fully offset the negative effect of debt quantity increase nor recover the seigniorage revenue that the U.S. historically earned.

Keywords: Convenience Yield, Seigniorage Revenue, Fiscal Capacity