U.S. Risk and Treasury Convenience - Giancarlo Corsetti

Speaker: Giancarlo Corsetti, European Institute University (EUI)

Location: online or at Kiel Institute for the World Economy, Chausseestraße 111, 10115 Berlin

Organizers: Kiel Institute for the World Economy, CEPR

Registration: Please sign up to receive the newsletter and zoom links for the seminar. If you plan to attend in person, please let us know here beforehand.

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 in 2002-2006 and 2010-2014.