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U.S. Risk and Treasury Convenience

Author

Listed:
  • Corsetti, G.
  • Lloyd, S.
  • Marin, E.
  • Ostry, D.

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.

Suggested Citation

  • Corsetti, G. & Lloyd, S. & Marin, E. & Ostry, D., 2025. "U.S. Risk and Treasury Convenience," Cambridge Working Papers in Economics 2570, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:2570
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    References listed on IDEAS

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    1. Brandt, Michael W. & Cochrane, John H. & Santa-Clara, Pedro, 2006. "International risk sharing is better than you think, or exchange rates are too smooth," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 671-698, May.
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    6. Hanno Lustig & Andreas Stathopoulos & Adrien Verdelhan, 2019. "The Term Structure of Currency Carry Trade Risk Premia," American Economic Review, American Economic Association, vol. 109(12), pages 4142-4177, December.
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    Keywords

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    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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