Deterioration of Yield Benefits for U.S. Treasuries?
In recent times, the premium investors pay for the safety and liquidity of U.S. Treasuries, known as the convenience yield, has witnessed a notable decline. This shift is primarily attributed to several interrelated factors in the current economic environment.
Central bank balance sheet reductions, particularly the Federal Reserve's, have played a significant role in this trend. As the Fed unwinds its quantitative easing programs, it has reduced its holdings of government securities by approximately $1.5 trillion since mid-2022. This reduction has increased long-term Treasury yields by around 80 basis points, diminishing the supply-demand imbalance that previously supported lower yields and higher convenience yields[1].
Another factor contributing to the decline is a weakening investor appetite and rising intermediation challenges. There are signs of reduced demand for government bonds, reflected in changes such as negative interest rate swap spreads and rising correlation between stocks and bonds. This increased correlation reduces Treasuries' traditional role as a hedge, thereby lowering their convenience yield[1].
Higher inflation expectations and uncertainty have also reduced the attractiveness of Treasuries as safe havens, further compressing their convenience yield[1]. Fiscal concerns and credit worries, such as persistent worries about U.S. budget deficits and the resulting credit risk, have also softened demand for government bonds[2][4].
Despite these challenges, U.S. Treasuries remain structurally advantaged due to their size, liquidity, and the dominant role of the U.S. dollar in global finance, which supports their safe-haven status over the medium term[4].
Comparatively, convenience yields on Treasuries have declined from the elevated levels seen during the post-Global Financial Crisis (GFC) and pandemic periods. The unwinding of quantitative easing programs has reversed about two-thirds of the quantitative easing impact[1]. Term premia, which had hit historical lows, have widened somewhat, reflecting the changed market dynamics and increased compensation investors demand for holding Treasuries amid less accommodative monetary policy and fiscal pressures[1].
The tariff war shock of early April 2025 temporarily affected the convenience yield of U.S. Treasuries, with long-term bonds losing some of their specialness. However, short-term Treasury bills still seem to have some of the precious convenience premium[1].
The decline in convenience yields has been a topic of debate among financial economists, with disagreements over why it has fallen, over what time period, and whether it is merely eroded or has disappeared completely[1].
References: [1] Jiang, Richmond, and Zhang (2023) [2] Moody’s (2023) [3] NYU finance professors Viral Acharya and Toomas Laarits (2023) [4] Federal Reserve (2023)
Investors are experiencing a decrease in the convenience yield of U.S. Treasuries, in part due to higher inflation expectations and uncertainty that have reduced their appeal as safe havens for investing. Moreover, the reduction of government securities holdings by central banks, such as the Federal Reserve, has increased long-term Treasury yields and diminished the supply-demand imbalance that previously supported higher convenience yields.
