The Demand and Supply of Convenience Assets

Safe and liquid assets (convenience assets) are used to make payments, meet unexpected consumption shocks, and facilitate financial transactions. The value of these convenience services is captured by the convenience yield, which is determined by the aggregate demand and supply of convenience assets. US Treasury securities are a prime example of a convenience asset, while bank and nonbank financial institutions also produce claims with varying degrees of safety and liquidity. Repos are safe and liquid securities created from tranching a long-term bond into a risky equity claim and a debt repo claim. Banks and bond mutual funds create liquid assets by pooling across investors’ idiosyncratic liquidity risk. Finally, packaging securities into a composite, as in mortgage-backed securities, also creates liquid and safe assets. Private sector creation of convenience assets involves a number of challenges, including leverage constraints and panic runs. We discuss how to measure convenience yields, convenience asset creation by the private sector, and the equilibrium determination of convenience yields.