Diminishing Treasury Convenience Premiums: Effects of Dealers' Excess Demand in Auctions

After the global financial crisis, the yields of U.S. Treasury bills frequently exceed other risk-free rate benchmarks, thereby pointing to a diminishing convenience premium. Moreover, increases in market uncertainty (measured by VIX), increase Treasury yields instead of triggering flights to safety. We show that the falling excess demand of primary dealers in Treasury auctions and their increased balance sheet constraints post-2015, are the key variables in explaining these patterns. Even after accounting for Treasury supply, levels of interest rates, and other controls, primary dealers' excess demand and balance sheet constraints are the main drivers of Treasury yields and spreads.