The convenience yield associated with Treasuries has declined. The safe haven effect for Treasuries has also declined when measuring the reaction during the COVID pandemic. The most pressing question is why Treasuries are less of a safe haven. Researchers have focused on the supply of Treasuries as the leading reason. There is a premium paid for the safe asset if there is a threat of a shortage. If the supply of Treasury increases, the threat will be reduced, and more importantly, there is a risk that the safe asset will lose its value. There will be a desire to find alternative safe assets.
Since the Great Financial Crisis, there has been a doubling of the debt to GDP in the US. Additionally, there has been a more than fourfold increase in the total public debt from $8 to $36 trillion. That is a lot of safe assets. If there is less need for the safe asset and if investors believe the safe assets are less safe, then the convenience yield will go down and the relative cost of financing will increase.
If the safe haven effect falls, there will be a search for substitutes, and the cost of Treasury funding will increase.
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