Decoupling dollar and Treasury privilege

 

When we think about the exorbitant privilege of the US markets, the question should be divided into two parts. The Treasury privilege is associated with financing at lower rates than in other countries and with the dollar’s use across the information finance landscape. They are not exactly the same thing. 

The paper "Decoupling Dollar and Treasury Privilege" shows a difference in the convenience yields between Treasuries and the dollar. The convenience of the dollar is measured by the covered interest rate parity (CIP) between risk-free bank rates, SOFR, and the convenience yield of treasuries, which is captured by CIP deviations in government bond yields. There has been a divergence between these two convenience yield measures. 

The dollar convenience yield exists in the post-GFC period, while the convenience yield for Treasuries has turned negative, especially for longer maturities. The authors argue that this change in Treasury yields is related to the excess supply of Treasuries. This sends a clear warning that the US Treasury cannot finance debt at the current rate.