Treasury Buybacks and the Convenience Yield

KEY TAKEAWAYS

In recent months, the sharp rise in Treasury yields has been attributed to a range of forces, including the U.S. government’s growing funding needs. One additional factor has been a decline in the “convenience yield” for Treasuries.
The convenience yield represents investors’ willingness to accept a return for the convenience of holding Treasuries, as they are relatively safe and liquid. A declining convenience yield means investors want a higher yield on these securities.
In September, the U.S. government announced a plan to increase U.S. Treasury buybacks to help stabilize yields. Has this effort been reflected in a change in the convenience yield?
While buybacks do improve liquidity, the effort hasn’t shown a reversal in the convenience yield’s decline, according to different measures of this yield.

U.S. Treasury yields rose sharply in recent months, particularly at the long end of the curve. In the first week of October, the 10-year yield reached about 5.3% and the 30-year yield rose above 5.6%, their highest level since September 2002. Yields have gone down since then, although they remain higher than at the beginning of the year.

This selloff reflects several forces operating at once: Higher oil prices revived inflation concerns, economic activity remains resilient, and the supply of Treasury issuances that investors must absorb has been growing.

These pressures affect long-term yields through two separate channels:

Raising the expected path of future short-term rates and the term premium investors demand for duration risk.
Eroding the “convenience” premium investors have traditionally accepted to hold U.S. government debt. This premium, also called the convenience yield, represents investors’ willingness to accept a lower yield for the convenience of holding securities as they are relatively safe and liquid.

In response, the Treasury has expanded its buyback operations, particularly in longer-dated securities, as a tool to support market functioning. Focusing on the financial market response through Oct. 1, this blog post examines what Treasury buybacks are designed to do, how they relate to the concept of the convenience yield, and why — despite larger and more frequent interventions — they appear to have had limited success in slowing the recent rise in long-term yields.This analysis was completed before the Treasury’s quarterly refunding announcement on Nov. 4.

Evidence suggests that buybacks primarily address illiquidity in specific off-the-run securities — which include all but the most recently issued debt — rather than the broader decline in the convenience premium attached to U.S. government debt.

What Are Treasury Buybacks?

Treasury buybacks are a debt management operation in which the U.S. Treasury repurchases outstanding Treasury securities, particularly older, less-liquid, off-the-run bonds. The buybacks’ primary purpose is to improve market liquidity. In the refunding announcement on Aug. 5, the Treasury anticipated that it would purchase $38 billion in off-the-run securities for cash management purposes through October. Separately, the Treasury doubled the maximum size of its liquidity-support buybacks in longer-term securities, from $2 billion to $4 billion per operation, beginning Sept. 9, with the stated objective of providing greater liquidity support in long-dated securities.

Do Buybacks Support the Convenience Yield?

One reason liquidity matters is the effect it has on the convenience yield associated with U.S. Treasuries. Investors have historically been willing to hold Treasury securities at lower yields than otherwise comparable assets because Treasuries provide additional benefits, including high liquidity, the ability to be used as collateral, and being safer than other assets during periods of market stress. This additional value is commonly referred to as the Treasury convenience yield.

A higher convenience yield benefits the Treasury because investors are willing to accept a lower return to hold government debt, which reduces government borrowing costs. Yet this yield is not directly observable in the market, so it must be estimated using various methods.

As discussed in related work by Julian Kozlowski and Nicholas Sullivan, one way of calculating the convenience yield is to subtract Treasury yields from AAA corporate yields, or more cleanly, subtract 10-year government bond yields from 10-year overnight index swap (OIS) rates.

Buybacks preserve part of this premium by removing less-liquid off-the-run securities: If the Treasury market becomes easier to trade, investors may demand a smaller liquidity premium to hold government debt.

However, recent market reactions show the limits of this mechanism. In September, despite a larger intervention, yields on 10-, 20-, and 30-year Treasuries continued to rise. The primary reason is that buybacks address illiquidity, but do not necessarily reverse a declining convenience yield, as the following figures show. The first figure displays the spread between Moody’s Aaa corporate and Treasury yields. (The dashed vertical line represents the Sept. 9 announcement on the doubling of Treasury buybacks.)

The Aaa corporate-Treasury yield spread provides a proxy for the relative convenience value of holding Treasury securities. The spread has declined from levels observed in the early 2010s, when the spread was more than 1.40 percentage points for most of that period, suggesting that the yield advantage Treasuries historically enjoyed over highly rated corporate bonds has narrowed. This narrowing is consistent with a decline in the relative convenience premium attached to Treasury securities.

Using Swap Rates to Measure the Convenience Yield

Another measure of convenience yield, which YiLi Chien and Kevin Bloodworth noted in a 2026 blog post, compares different U.S. government bond yields with maturity-matched OIS rates. See the second figure below. A positive value indicates investors are willing to accept a lower yield to hold Treasuries; a negative value means investors want a higher yield to hold Treasuries.

Under this measure, convenience yields for one-year Treasury bills remained constant in recent years while they declined as maturity increased, with the largest negative spreads concentrated at longer maturities. (See the second figure.)

When examining the period around the announced increase in Treasury buybacks in September, there is no immediate visible reversal in convenience yield measures. (See the third figure.)

Conclusion

These figures suggest that the erosion of the convenience yield is not simply a liquidity problem, which may be one reason for the limited success of Treasury buybacks in stabilizing long-term yields. Buybacks can improve the liquidity of specific off-the-run securities, but they do not directly reverse broader forces, such as tighter monetary policy or a decline in the overall convenience premium that investors accept for government debt. As a result, buybacks may improve market functioning without materially reducing benchmark Treasury yields.

Taken together, these findings suggest a basic limitation on the ability of Treasury buybacks to influence long-term yields. Buybacks are well suited to address the problem they were designed for — illiquidity in specific off-the-run securities — and in that narrow sense, they appear to be working as intended. But the recent rise in long-term yields reflects a different and broader set of forces: higher expected short-term rates, a larger term premium, and as the cross-maturity evidence suggests, a structural decline in the convenience premium investors generally attach to U.S. government debt. Because buybacks are most effective operating through the liquidity channel, their use will likely not offset pressures originating elsewhere.

Note

This analysis was completed before the Treasury’s quarterly refunding announcement on Nov. 4.