Bond Convenience Yields in the Eurozone Currency Union

55 Pages Posted: 30 Mar 2021 Last revised: 26 Jan 2024

See all articles by Zhengyang Jiang

Zhengyang Jiang

Kellogg School of Management - Department of Finance; National Bureau of Economic Research (NBER)

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); ABFER

Mindy Z. Xiaolan

University of Texas, Austin - Department of Finance

Date Written: December 22, 2020

Abstract

In a monetary union, the risk-free rate cannot respond to country-level fiscal positions, leaving only default spreads and convenience yields to respond. Empirically, we find that convenience yields explain a large share of the variation in Eurozone sovereign bond yields. Eurozone countries earn larger convenience yields when they experience larger surpluses, suggesting convenience yields are important fiscal shock absorbers. Since convenience yields generate substantial seigniorage revenue from debt issuance, our estimates imply economically large fiscal costs from low convenience yields for peripheral countries in the Eurozone.

Keywords: bond pricing, fiscal policy, convenience yield, currency union

Suggested Citation

Jiang, Zhengyang and Lustig, Hanno N. and Van Nieuwerburgh, Stijn and Xiaolan, Mindy Z., Bond Convenience Yields in the Eurozone Currency Union (December 22, 2020). Columbia Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3797321 or http://dx.doi.org/10.2139/ssrn.3797321

Zhengyang Jiang (Contact Author)

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

HOME PAGE: http://sites.google.com/site/jayzedwye/

National Bureau of Economic Research (NBER) ( email )

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Hanno N. Lustig

Stanford Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Stijn Van Nieuwerburgh

Columbia University Graduate School of Business ( email )

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Centre for Economic Policy Research (CEPR)

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ABFER ( email )

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Mindy Z. Xiaolan

University of Texas, Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

HOME PAGE: http://sites.google.com/view/mindyxiaolan

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