Treasuries have been a safe asset, but it’s unclear whether they still are. A safe asset means that investors will pay a premium to hold it, so there is a convenience yield between it and the next safest asset. Treasuries will trade at a lower yield than AAA-rated bonds. This convenience yield is time-varying. It will change with the business cycle and market fragility. A crisis or recession will lead to higher convenience yields. Similarly, if safe-asset supply increases relative to demand, the convenience yield will decline. Ultimately, perceptions of safety matter. Treasuries are safe because they are viewed as safe relative to other alternatives. The structure and liquidity of the safe asset affect this perception.
Unfortunately, convenience yields have collapsed and are showing no safety premium. This is consistent with a positive stock-bond correlation. Safety from Treasuries relative to the risky asset is limited, given they are moving in the same direction. This is more than a correlation story, so investors should take note of the fall in convenience yield.
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