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Working Paper
Supply of Sovereign Safe Assets and Global Interest Rates
We estimate that the supply of sovereign safe assets is a major driver of neutral interest rates--real rates consistent with both economic activity and inflation at their trends. We find this result using an empirical cross-country model with many economic drivers for the neutral rates of 11 advanced economies during the 1960-2019 period. The increasing availability of safe assets after 2008 has pushed up neutral rates, preventing them from continuing their previous decline because of other drivers. We also evaluate the "global savings glut" hypothesis. We estimate that since 1994 the global ...
Working Paper
U.S. Housing as a Global Safe Asset: Evidence from China Shocks
This paper demonstrates that the measured stock of China's holding of U.S. assets could be much higher than indicated by the U.S. net international investment position data due to unrecorded historical Chinese inflows into an increasingly popular global safe haven asset: U.S. residential real estate. We first use aggregate capital flows data to show that the increase in unrecorded capital inflows in the U.S. balance of payment accounts over the past decade is mainly linked to inflows from China into U.S. housing markets. Then, using a unique web traffic dataset that provides a direct measure ...
Journal Article
Exploring the Safety Premium of Safe Assets
Investors are usually willing to pay a higher price, known as a premium, for a safe fixed-income asset in return for the convenience of its high quality and liquidity. A study of Swiss government bonds—widely considered to be extremely safe but not particularly liquid—can give some insights into how quality affects the premium. The large and variable safety premium of these bonds surged to persistently higher levels following the launch of the euro. However, subsequent large asset purchases by the European Central Bank depressed the safety premium.
Working Paper
Investor Demands for Safety, Bank Capital, and Liquidity Measurement
We construct a model of a bank's optimal funding choice, where the bank negotiates with both safety-driven short-term bondholders and (mostly) risk-taking long-term bondholders. We establish that investor demands for safety create a negative relationship between the bank's capital choices and short-term funding, as well as negative relationships between capital and common measures of bank liquidity. Consistent with our model, our bank-level empirical analysis of these capital-liquidity tradeoffs show (1) that bank liquidity measures have a strong and negative relationship to its capital ratio ...
Working Paper
The Effect of Safe Assets on Financial Fragility in a Bank-Run Model
Risk-averse investors induce competitive intermediaries to hold safe assets, thereby lowering the probability of a run and reducing financial fragility. We revisit Goldstein and Pauzner (2005), who obtain a unique equilibrium in the banking model of Diamond and Dybvig (1983) by introducing risky investment and noisy private signals. We show that, in the optimal demand-deposit contract subject to sequential service, banks hold safe assets to insure investors against investment risk. Consequently, fewer investors withdraw prematurely, which reduces the probability of a bank run. Safe asset ...
Working Paper
What Drives U.S. Treasury Re-use?
We study what drives the re-use of U.S. Treasury securities in the financial system. Using confidential supervisory data, we estimate the degree of collateral re-use at the dealer level through their collateral multiplier : the ratio between a dealer's total secured funding and their outright holdings financed through secured funding. We find that Treasury re-use increases as the supply of available securities decreases, especially when supply declines due to Federal Reserve asset purchases. We also find that non-U.S. dealers' re-use increases when profits from intermediating cash are high, ...
Working Paper
The Financial Origins of Non-Fundamental Risk
We formalize the idea that the financial sector can be a source of non-fundamental risk. Households' desire to hedge against price volatility can generate price volatility in equilibrium, even absent fundamental risk. Fearing that asset prices may fall, risk-averse households demand safe assets from leveraged intermediaries, whose issuance of safe assets exposes the economy to self-fulfilling fire sales. Policy can eliminate nonfundamental risk by (i) increasing the supply of publicly backed safe assets, through issuing government debt or bailing out intermediaries, or (ii) reducing the ...
Discussion Paper
What Makes a Safe Asset Safe?
Over the last decade, the concept of “safe assets” has received increasing attention, from regulators and private market participants, as well as researchers. This attention has led to the uncovering of some important details and nuances of what makes an asset “safe” and why it matters. In this blog post, we provide a review of the different aspects of safe assets, discuss possible reasons why they may be beneficial for investors, and give concrete examples of what these assets are in practice.
Report
Fragility of Safe Asset Markets
In March 2020, safe asset markets experienced surprising and unprecedented price crashes. We explain how strategic investor behavior can create such market fragility in a model with investors valuing safety, investors valuing liquidity, and constrained dealers. While safety investors and liquidity investors can interact symbiotically with offsetting trades in times of stress, liquidity investors’ strategic interaction harbors the potential for self-fulfilling fragility. When the market is fragile, standard flight-to-safety can have a destabilizing effect and trigger a “dash-for-cash” by ...
Working Paper
Decoupling Dollar and Treasury Privilege
We document a strong decoupling between the convenience yield on the US Dollar and US Treasuries. We measure the convenience of the U.S. dollar using covered interest parity (CIP) deviations between risk-free bank rates, such as secured overnight rates since the benchmark reform. In parallel, we measure the convenience of U.S. Treasury bonds through CIP deviations between government bond yields. We find a pronounced divergence between the two convenience measures in recent years: while the U.S. dollar exhibits strong convenience post-Global Financial Crisis, the U.S. Treasury convenience has ...