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The Impact of Monetary Policy on the Specialness of U.S. Treasuries

I estimate the causal effect of monetary policy on the specialness of U.S. Treasuries. Measuring this specialness using the U.S. Treasury Premium, which is the difference in the convenience yield of U.S. Treasuries and that of government bonds of other developed countries measured as the deviation from covered interest parity between government bond yields, I find that monetary tightening by the Federal Reserve increases the specialness of U.S. Treasuries primarily by increasing the convenience yield of U.S. Treasuries. I also find that the magnitude of the impact varies across the term structure and across countries, especially after the GFC, and U.S. and foreign monetary policy shocks have asymmetric impacts on the specialness of U.S. Treasuries. These results provide evidence for the unique ability of the Federal Reserve to affect the specialness of U.S. Treasuries by altering the supply of dollar safe assets.