Convenience yields for US Treasuries have turned negative since 2010 while dollar convenience persists, according to economists Wenxin Du and colleagues. This divergence contradicts conventional wisdom that dollar demand and Treasury convenience should align. The study uses covered interest parity deviations to measure market frictions, revealing a sharp split at 30-year tenors where Treasury convenience dropped below risk-free alternatives.

The researchers compare Treasury yields to synthetic bonds created via FX arbitrage and dollar returns to interbank rates like SOFR. Their analysis shows market distortions emerged after Basel III regulations increased balance-sheet costs for dealers, limiting their ability to intermediate both currencies and bonds. This created a feedback loop where Treasuries lost convenience as collateral demand surged while dollar liquidity remained constrained.

The decoupling now extends to short-term instruments like 3-month Treasury bills, raising borrowing costs for the US government despite sustained dollar demand. Du’s team argues this signals a structural shift in how global markets price safety and liquidity, with implications for central bank policies and cross-border capital flows.

Critical figure: The 30-year Treasury convenience yield now trades at a 1.2% discount to synthetic alternatives, the widest gap since 2000. This divergence reflects both expanded US debt issuance and regulatory-induced market fragmentation, challenging decades-old assumptions about dollar hegemony.