Bond convenience curves and funding costs

Juuso Nissinen and Markus Sihvonen

No 11/2022, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: A convenience yield represents a difference between yield on a safe bond and yield on a synthetic safe bond, constructed by combining a risky bond with a CDS contract. We explain the shapes of eurozone sovereign convenience curves using a model in which arbitrageurs face higher funding costs on bonds with credit risk and bond demand shocks induce funding risk. We provide novel causal evidence for our mechanism using variation in funding costs generated through exogenous haircut category changes. Changes in convenience yields represent a key transmission channel of unconventional monetary policy to bond yields.

Keywords: Sovereign bond convenience yields; money markets; asset pricing with frictions; monetary policy (search for similar items in EconPapers)
JEL-codes: G12 G15 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fmk, nep-ifn and nep-rmg
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Journal Article: Bond convenience curves and funding costs (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:112022

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