The Declining Convenience Yield and Quantitative Tightening

Investors traditionally have been drawn to government bonds because they offer nonpecuniary benefits, such as exceptional liquidity and the ability to serve as high-quality collateral. These benefits are reflected in what is called a “convenience yield,” the amount of interest investors are willing to forgo for the convenience of holding government securities.

In recent years, however, convenience yields not only have declined but also have turned negative across major economies. In this blog post, we examine movements in government bond convenience yields following the implementation of quantitative tightening by major central banks. Our findings suggest that the downward shift in convenience yields may reflect both increased bond supply and growing concerns about fiscal trajectories in advanced economies.

What Is the Convenience Yield?

Government bond yields, especially long-term yields, serve as a key reference rate for many other interest rates in the economy. Because government bonds are generally considered low-risk benchmarks, lenders and investors typically price other loans and securities as a spread over these yields. For example, U.S. 30-year mortgage rates often move closely with 10-year U.S. Treasury yields.

Yields on government bonds are influenced by a wide range of macroeconomic and financial factors. A standard way to analyze these influences is through a decomposition of yields. In this framework, a long-term government bond yield can be expressed as the sum of expected future short-term interest rates and a term premium, minus a convenience yield:

• The expected short-term rate reflects market expectations about the future path of monetary policy.
• The term premium compensates investors for bearing the risks associated with holding long-term bonds, including uncertainty about future interest rates and inflation.
• The convenience yield captures the nonpecuniary benefits of holding government bonds, such as their use as high-quality collateral in repo markets, their exceptional liquidity, their low default risk and their importance for meeting regulatory requirements like the liquidity coverage ratio.

Fluctuations in any of these components can lead to significant movements in observed government bond yields.

The Measurement of the Convenience Yield

Measuring the convenience yield typically relies on comparing government bonds with another asset that has a very similar payment schedule and interest rate risk characteristics. The basic strategy is to identify an asset whose yield embeds the same, or nearly the same, expected short-term rate and term premium as a Treasury bond but does not provide the same nonpecuniary benefits. The difference in yields between the two assets can then be interpreted as the convenience yield of holding Treasuries. As discussed in related work by Julian Kozlowski and Nicholas Sullivan, this approach can be implemented using several comparisons, including the AAA-Treasury spread, swap spreads and box spreads.

This blog post focuses on swap spreads, defined as the difference between the interest rate swap rate and the Treasury yield of the same maturity.Specifically, we use the overnight index swap (OIS) for the relevant country; the OIS exchanges a fixed rate for the realized overnight rate, making it a near risk-free benchmark for interest rates. For the U.S., we use the secure overnight financing rate (SOFR) as the rate to calculate the interest rate swap. For Germany, Japan and the U.K., we use the euro short-term rate (€STR), the Tokyo overnight average rate (TONA) and the sterling overnight index average (SONIA), respectively. The key idea is that the swap rate can be written as the sum of the expected short-term rate and a term premium, similar to a Treasury yield, but without the additional benefits associated with holding government bonds. Under the assumption that both the swap rate and the Treasury yield share the same expected short-term rate and term premium, the difference between the two, namely the swap rate minus the Treasury yield, backs out the convenience yield. This convenience yield reflects the extra value investors place on Treasuries because of their liquidity, collateral usefulness in repo markets, low default risk and regulatory advantages. A positive value indicates investors are willing to accept a lower interest rate to own Treasuries; a negative value means investors demand a higher interest rate to own Treasuries.

The Decline of Convenience Yields

The blue line in the figure below plots the convenience yield on 10-year U.S. Treasury notes since the beginning of 2022. During this period, U.S. Treasury convenience yields have been negative. A negative U.S. Treasury convenience yield indicates that holding Treasuries provides no special liquidity or safety benefit and may instead impose a cost because they use up scarce balance sheet space (that is, the limited capacity financial institutions have to hold assets under regulatory capital and leverage constraints). As a result, holding U.S. Treasuries is more expensive compared with holding close substitutes, such as overnight interest rate swaps. The literature documents a secular decline in U.S. Treasury convenience yields since the 2007-09 global financial crisis.For example, see Zhengyang Jiang, Robert J. Richmond and Tony Zhang’s 2025 National Bureau of Economic Research working paper, “Convenience Lost.” Before the crisis, convenience yields were positive across all maturities, but they have declined over time and gradually turned negative.

The figure also shows that other countries have followed a similar trajectory. Before 2023, the convenience yields of German, Japanese and U.K. government bonds (shown in red, green and gold lines, respectively) were generally positive, ranging from nearly zero to around 80 basis points. Over the past two years, these yields have declined sequentially. By the end of 2025, convenience yields for all four countries were negative, ranging from approximately -20 to -60 basis points.

Driven by Quantitative Tightening

What drives these significant changes over such a relatively short period? One key factor may be quantitative tightening (QT) policies. Under QT, the central bank sells government bonds from its balance sheet, thereby withdrawing bank reserves from the banking sector; this is the opposite of quantitative easing (QE), in which the central bank buys government bonds and thus expands bank reserves to the banking sector. By increasing the net supply of government bonds to markets, QT pushes up yields, and the greater availability of bonds can reduce their convenience yields.

In the figure above, we mark the dates when QT or QE tapering policies were implemented. In June 2022, the Federal Reserve began implementing QT, and the U.S. Treasury convenience yield subsequently declined further, from around -20 basis points to nearly -60 basis points, before partially rebounding to about -40 basis points by the end of 2025. The rebound may be related to market expectations of a halt to the Fed’s QT policy. The Fed officially stopped its QT policy on Dec. 1, 2025.

Meanwhile, convenience yields in other countries initially increased when the Fed began its QT. However, they began to decline once each country’s central bank implemented its own version of QT policy. For example:

• The Bank of England (BOE) started its active QT policy to reduce the stock of QE assets in November 2022. Its convenience yield fell from about +20 basis points to -50 basis points by the end of 2025.
• A similar pattern is observed in German government bonds once the European Central Bank (ECB) began its balance-sheet normalization (QT) in March 2023, with the convenience yield declining from +40 basis points to nearly -20 basis points by the end of 2025.
• The Bank of Japan (BOJ) started tapering its bond purchases in March 2024, after which Japanese government bond convenience yields fell from close to +20 basis points to nearly -20 basis points in December 2025.

These patterns suggest that QT implementation across major central banks has been a key driver of declining convenience yields, reflecting both the increased supply of government bonds and a potential erosion of their perceived safety and liquidity benefits.

Declining Convenience Yield Is Consistent with “Bond Vigilante” Narrative

The decline in convenience yields is consistent with the “bond vigilante” narrative, in which investors respond to deteriorating fiscal conditions by demanding higher yields on government debt. Since the onset of the COVID-19 pandemic, government debt has risen sharply across advanced economies, with ratios of public debt to gross domestic product (GDP) increasing significantly in the U.S., Europe, Japan and the United Kingdom, reaching levels not seen since wartime periods.

Supported by accommodative monetary policies, such as quantitative easing and persistently low interest rates, government bond prices did not fully reflect underlying fiscal fundamentals, largely muting the bond vigilante effect. As we suggest in this blog post, once central banks began to reverse these accommodative policies, government bond convenience yields started to decline, reflecting the realities of elevated debt-to-GDP ratios and increasingly strained fiscal trajectories across these economies.

Notes

1. Specifically, we use the overnight index swap (OIS) for the relevant country; the OIS exchanges a fixed rate for the realized overnight rate, making it a near risk-free benchmark for interest rates. For the U.S., we use the secure overnight financing rate (SOFR) as the rate to calculate the interest rate swap. For Germany, Japan and the U.K., we use the euro short-term rate (€STR), the Tokyo overnight average rate (TONA) and the sterling overnight index average (SONIA), respectively.
2. For example, see Zhengyang Jiang, Robert J. Richmond and Tony Zhang’s 2025 National Bureau of Economic Research working paper, “Convenience Lost.”