Measuring Government Bond Convenience Yields Across Countries

Summary

The document defines a bond convenience yield as a noncash benefit of holding a bond, reflected in a lower yield than comparable bonds. It outlines an empirical comparison of eurozone government bonds issued in a shared currency and subject to the same central policy rate. The cited study controls for credit risk using credit default swaps and treats the remaining same-maturity yield difference as a convenience yield. It reports that German government bonds yield substantially less than bonds from other countries, with a differential exceeding fifty basis points relative to southern economies.

The document poses the question of what causes these differences but does not provide an explanation. Its evidence is a brief description of one study and a reported yield spread, not a general causal analysis. The result depends on the study’s credit adjustment and its interpretation of residual yield differences as nonpecuniary benefits; other factors may also affect observed yields.

Key ideas

• Convenience yield is a noncash benefit associated with holding a bond.
• The described study compares same-maturity government bonds within the eurozone.
• It adjusts for credit risk using credit default swaps before interpreting residual yield differences.
• The account reports lower yields for German bonds but does not establish why they occur.

Tags

# What explains bond “convenience yields”?


# What explains bond “convenience yields”?












Bond convenience yield refers to nonpecuniary benefits of holding bonds, that is, some benefit other than direct cash flows. Recently there has been much empirical academic research on such yields.

For example this paper (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3797321) considers yield differences between government bonds issued by different eurozone countries, which simplifies issues as the bonds are dominated in the same currency and share the same policy rate. It adjusts for credit risk using CDS contracts and defines a convenience yield as the resulting difference in same maturity yields. Even controlling for credit risk, it finds that German bonds trade at much lower yields than bonds issued by other countries (the yield differential to southern economies is more than 50 bps).

What explains such convenience yields?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.