Treasury convenience yield and inflation

 

The convenience yield associated with Treasury securities is dynamic, meaning the price of safety associated with this safe asset is constantly changing with the macro environment. This important paper, "Inflation and Treasury Convenience,” on the macro dynamics of the convenience yield finds that inflationary supply shocks raise the opportunity cost of holding money and money-like assets, increasing convenience yields. Exogenous liquidity demand shocks will also elevate convenience but depress consumption and inflation. Given the difference between supply and demand shocks, there will be a weaker convenience-inflation link in the post-2000 period, which saw more liquidity demand shocks.  

This shows that convenience yield will be associated with macro dynamics and not just the demand for safety. My view is that this work makes it more difficult to discuss when there is a change in safety for Treasury assets. Yes, we can say it will be linked with macro dynamics, but ultimately most are interested in the price of safety based on some form of risk.