U.S. Risk and Treasury Convenience

Giancarlo Corsetti, Simon Lloyd, Emile Marin and Daniel Ostry

No 20657, CEPR Discussion Papers from Centre for Economic Policy Research

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: Equity; risk; premium (search for similar items in EconPapers)
JEL-codes: F30 F31 G12 (search for similar items in EconPapers)
Date: 2025-09
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Working Paper: U.S. Risk and Treasury Convenience (2025)
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