U.S. Risk and Treasury Convenience

Giancarlo Corsetti, Simon Lloyd, Emile Marin and Daniel Ostry

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: We document a rise in investors' assessment of U.S. risk relative to other G.7 economies since the late 1990s, driven by higher permanent risk but not reflected in currency returns. Using a two-country framework with trade in a rich maturity structure of bonds which earn convenience yields, alongside risky assets and currencies, we establish an equilibrium relationship between cross-border convenience yields, relative country risk and carry-trade returns. Empirically, we identify a cointegrating relationship between relative permanent risk and long-maturity convenience yields. Counterfactual experiments show rising relative permanent risk explains around one-third of declining long-maturity convenience yields over 2002-2006 and 2010-2014.

Keywords: Convenience Yields; Exchange Rates; Long-Run Risk; U.S. Safety; Equity Risk Premium (search for similar items in EconPapers)
JEL-codes: F30 F31 G12 (search for similar items in EconPapers)
Date: 2025-09-16
New Economics Papers: this item is included in nep-ifn and nep-mac
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Working Paper: U.S. Risk and Treasury Convenience (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2570

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