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  3. 2024
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  5. Asset Pricing: Safe Asset and Government Debt
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Asset Pricing: Safe Asset and Government Debt

Paper Session

Saturday, Jan. 6, 2024 8:00 AM - 10:00 AM (CST)

Marriott Rivercenter, Grand Ballroom Salon A
Hosted By: American Finance Association
  • Chair: William Diamond, University of Pennsylvania

When Do Treasuries Earn the Convenience Yield? --- A Hedging Perspective

Viral Acharya
,
New York University
Toomas Laarits
,
New York University

Abstract

We document that the convenience yield of U.S. Treasuries exhibits properties that are consistent with a hedging perspective of safe assets, i.e., Treasuries are valued highly because they appreciate with poor aggregate shocks. The convenience yield tends to be low when the covariance of Treasury returns with the aggregate stock market returns is high. A decomposition of the aggregate stock-bond covariance into terms corresponding to the convenience yield, the frictionless risk-free rate, and default risk reveals that the covariance between stock returns and the convenience yield itself drives the effect in a substantive capacity. We show the convenience yield is reduced with heightened inflation expectations that erode the hedging properties of U.S. Treasuries and other fixed-income money-like assets, inducing a switch to alternatives such as gold; it is also reduced immediately prior to debt-ceiling standoffs and with increases in Treasury supply.

Central Bank’s Balance Sheet and Treasury Markets Disruptions

Adrien d'Avernas
,
Stockholm School of Economics
Quentin Vandeweyer
,
University of Chicago
Damon Petersen
,
University of Chicago

Abstract

This paper presents a dynamic model of the Treasury market, accounting for
recent disruptions. We investigate the impact of various shocks on repo rates and
Treasury yields and examine policy implications. Our findings highlight the crucial
role of the reserves-to-outstanding Treasury securities ratio as a predictor of market
disruptions and emphasize the importance of central bank balance sheet policies
in maintaining stability. The model offers valuable insights for policymakers and
serves as a foundation for future research on regulation and policy interventions in
government securities markets.

The Imperfect Intermediation of Money-Like Assets

Jeremy Stein
,
Harvard University
Jonathan Wallen
,
Harvard University

Abstract

We document a surprising amount of friction in the intermediation of money-like assets. From March 2022 to January 2023, 1-month T-bills returned 29 bps less than reverse repo with the Federal Reserve. We show that this large spread in money-like rates is due to segmentation and inelastic substitution by money funds. In a simple counterfactual, we show that if the money funds had elastically substituted between money-like assets, then the spread would have been 19 bps smaller. Inelastic substitution by investors is a general limit of "arbitrage", even for the simplest, lowest-risk and most transparent asset markets.

The Zero-Beta Rate

Sebastian Di Tella
,
Stanford University
Benjamin Hebert
,
Stanford University
Pablo Kurlat
,
University of Southern California
Qitong Wang
,
University of Southern California

Abstract

We use equity returns to construct a time-varying measure of what we call the zero-beta
rate: the expected return of a stock portfolio orthogonal to the stochastic discount
factor. In contrast to safe rates, the zero-beta rate fits the aggregate Euler equation
remarkably well. It has a large and volatile spread with respect to the safe rate. This
spread responds to monetary policy shocks, which move zero-beta and safe rates in
opposite directions. We claim that the zero-beta rate is the correct intertemporal price
and that the safe rate primarily reflects the behavior of a convenience yield on safe
assets.

Discussant(s)
Adi Sunderam
,
Harvard University
Yiming Ma
,
Columbia University
Viral Acharya
,
New York University
Tyler Muir
,
Yale University
JEL Classifications
  • G1 - General Financial Markets