Convenience Yield and the Demand for US Treasury Securities

Filippo Cavaleri, Joint Program in Finance and Economics PhD Student

This paper investigates the heterogeneity in investors’ preferences for non-pecuniary attributes of U.S. Treasury securities. My goal is to determine which groups of investors draw benefits from holding Treasuries and the reasons why they are willing to pay a premium over safe and liquid corporate bonds. I first present a conceptual framework to interpret the implications of heterogeneity in valuations of convenience on yields and price elasticities. Then, using sector-level bond holdings from the Financial Accounts, I recover structural demand curves and rank investors by their valuations of  convenience services. Estimates reveal that the convenience of long term Treasuries is valuable for U.S. private depository institutions, and security brokers and dealers, whereas it is less attractive to households, pension funds and insurance companies. The ordering suggests that a safety attribute is secondary to liquidity even at longer maturities. Models of convenience yields should (i) accommodate heterogeneity in the elasticity of substitution between Treasuries and corporate bonds and (ii) incorporate liquidity motives at both long and short maturities.