Federal Reserve Board
Division of International Finance
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Washington, DC 20551
NBER Working Papers and Publications
|August 2017||The U.S. Treasury Premium|
with Joanne Im, Jesse Schreger: w23759
We quantify the difference in the convenience yield of U.S. Treasuries and the bonds of near default-free sovereigns by measuring the gap between the FX swap-implied dollar yield paid by foreign governments and the U.S. Treasury dollar yield. We call this wedge the “U.S. Treasury Premium.” We find that this premium was approximately 21 basis points for five-year bonds prior to the Global Financial Crisis, increased up to 90 basis points during the crisis, and has disappeared since the crisis with the post-crisis mean at -8 basis points. We show the decline in the premium cannot be explained away by credit risk or FX swap market mispricings. In addition, we present evidence that the relative supply of government bonds in the United States and foreign countries affects the premium.
Published: Wenxin Du & Joanne Im & Jesse Schreger, 2018. "The U.S. Treasury Premium," Journal of International Economics, .
|June 2017||The U.S. Treasury Premium|
with Joanne Im, Jesse Schreger
in NBER International Seminar on Macroeconomics 2017, Jeffrey Frankel, Hélène Rey, and Charles Engel, organizers
|February 2017||Deviations from Covered Interest Rate Parity|
with Alexander Tepper, Adrien Verdelhan: w23170
We find that deviations from the covered interest rate parity condition (CIP) imply large, persistent, and systematic arbitrage opportunities in one of the largest asset markets in the world. Contrary to the common view, these deviations for major currencies are not explained away by credit risk or transaction costs. They are particularly strong for forward contracts that appear on the banks' balance sheets at the end of the quarter, pointing to a causal effect of banking regulation on asset prices. The CIP deviations also appear significantly correlated with other fixed-income spreads and with nominal interest rates.
Published: WENXIN DU & ALEXANDER TEPPER & ADRIEN VERDELHAN, 2018. "Deviations from Covered Interest Rate Parity," The Journal of Finance, vol 73(3), pages 915-957.
|September 2016||Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy|
with Carolin E. Pflueger, Jesse Schreger: w22592
Nominal debt provides consumption-smoothing benefits if it can be inflated away during recessions. However, we document empirically that countries with more countercyclical inflation, where nominal debt provides better consumption-smoothing, issue more foreign-currency debt. We propose that monetary policy credibility explains the currency composition of sovereign debt and nominal bond risks in the presence of risk-averse investors. In our model, low credibility governments inflate during recessions, generating excessively countercyclical inflation in addition to the standard inflationary bias. With countercyclical inflation, investors require risk premia on nominal debt, making nominal debt issuance costly for low credibility governments. We provide empirical support for this mechanism, s...