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Safe Assets Markets

Paper Session

Friday, Jan. 3, 2025 10:15 AM - 12:15 PM (PST)

San Francisco Marriott Marquis, Yerba Buena Salon 12 & 13
Hosted By: American Finance Association
  • Giang Nguyen, Pennsylvania State University

Inflation and Treasury Convenience

Anna Cieslak
,
Duke University
Wenhao Li
,
University of Southern California
Carolin Pflueger
,
University of Chicago

Abstract

Using a century of data, we show that Treasury convenience yield and inflation comove positively during the inflationary 1970s-1980s, but negatively pre-WWII and post-2000. An inflation decomposition reveals that higher supply inflation predicts higher convenience, while lower demand inflation follows higher convenience. In our model, inflationary cost-push shocks raise the opportunity cost of holding money and money-like assets, inducing higher convenience, as in 1970s-1980s. Conversely, liquidity demand shocks drive up convenience but lower consumption demand and inflation in the model, as pre-WWII and post-2000. By linking the evidence to macroeconomic drivers, our results challenge that inflation directly depresses Treasury convenience.

The Stock-Bond Correlation: A Tale of Two Days in the U.S. Treasury Bond Market

Grace Xing Hu
,
Tsinghua University
Zhao Jin
,
Central University of Finance and Economics
Jun Pan
,
Shanghai Jiao Tong University

Abstract

Motivated by the central importance of U.S. Treasury (UST) and the increasing concern
over its resilience, we construct a high-frequency measure of stock-bond correlation to
capture UST safety, and more importantly, its riskiness. On days with highly negative
stock-bond correlations, safety matters the most and the pricing of global assets is
determined by their relative safety. For UST, the premier safe asset, the demand
for safety widens its convenience yield, shrinks the term premium, and breaks the
transmission from UST to USD. By contrast, on days with high stock-bond correlations,
UST pauses its safety status and becomes a source of risk, with increased volatility
and higher term premium. Prominent bond risky days captured by sudden and large
increases of our stock-bond measure are FOMC announcements (interest-rate risk),
2020 dash for cash (dealer-capacity risk), and 2021 inflation surge. Overall, our measure
is unique in capturing the dual and contrasting roles of UST -- sounding the alarm when
UST shifts abruptly from safety to risky.

Identifying the Effects of Demand for Safe Assets

Jefferson Duarte
,
Rice University
Tarik Umar
,
Rice University

Abstract

The Portfolio Balance Mechanism (PBM) theorizes that reducing the supply of U.S. Treasuries (USTs) increases their prices and prompts the creation of similar assets for preferred-habitat investors. The PBM is recognized as a possible mechanism to explain various important phenomena. We identify the PBM using the suspension of 30-year UST bond auctions between 2002 and 2005. The suspension prompted the issuance of safe, long-term collateralized mortgage obligations (CMOs), created by tranching mortgage pools to meet the demand of habitat-preference investors. The heterogeneity of USTs and CMOs results in an unusually clean and unambiguous identification of the PBM.

Safe Assets in Emerging Market Economies

Cristian Cuevas
,
Universidad de los Andes

Abstract

Do local-currency sovereign bonds in emerging markets (EMs) work as safe havens? Using data from nine middle-income EMs, I estimate the convenience yields of these bonds arising from their safety and liquidity after controlling for default, currency, and capital control risks. A model of secondary markets with search frictions predicts that if a bond holds a safe haven status, then its convenience yield positively correlates with systematic risk. The empirical analysis tests this prediction and shows that local-currency sovereign bonds act as safe assets against country-specific risks but only partially against global risks and only when compared to other domestic assets. The paper further explores the Taper Tantrum and Covid-19 shocks, finding that the loss of safe asset status against global risks is due to the demand for alternative global safe assets rather than increased default, currency, or regulatory risks of the bonds.

Discussant(s)
Anh Le
,
University of North Carolina-Chapel Hill
Min Wei
,
Federal Reserve Board
Zhaogang Song
,
Johns Hopkins University
Yoshio Nozawa
,
University of Toronto
JEL Classifications
  • G1 - General Financial Markets