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Discussion Paper

Understanding the “Inconvenience” of U.S. Treasury Bonds


Abstract: The U.S. Treasury market is one of the most liquid financial markets in the world, and Treasury bonds have long been considered a safe haven for global investors. It is often believed that Treasury bonds earn a “convenience yield,” in the sense that investors are willing to accept a lower yield on them compared to other investments with the same cash flows owing to Treasury bonds’ safety and liquidity. However, since the global financial crisis (GFC), long-maturity U.S. Treasury bonds have traded at a yield consistently above the interest rate swap rate of the same maturity. The emergence of the “negative swap spread” appears to suggest that Treasury bonds are “inconvenient,” at least relative to interest rate swaps. This post dives into this Treasury “inconvenience” premium and highlights the role of dealers’ balance sheet constraints in explaining it.

Keywords: Treasury Market; Covered interest rate parity; interest rate swaps;

JEL Classification: G1; G2;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2023-02-06

Number: 20230206

Note: Editor’s note: Since this post was first published, a reference in the second paragraph to primary dealers switching positions was corrected to read "a net-short to a net-long position." February 6, 10:37 a.m.