This paper studies how the demand for collateral in derivatives markets influences the pricing of U.S. Treasuries. I exploit the mechanical rules set by the Chicago Mercantile Exchange (CME) governing collateral requirements for interest rate futures to study how changes in margining practices affect the aggregate need for eligible collateral— predominantly short-term Treasury securities. Combining contract-level margin data with Treasury and derivatives yields, I show that increases in required collateral lead to a significant rise in short-term Treasury convenience yields (CY). A one-billion dollar increase in collateral demand raises the 30-day OIS-T-bill spread by about 1.4 to 1.5 basis points, implying that the 2021-2024 rise in aggregate collateral use (roughly $20 billion) accounts for 28-30 basis points of additional CY. These effects represent nearly half of the historical short-term convenience yield documented in prior work. The results highlight how margining rules and clearinghouse activity propagate into Treasury pricing, underscoring the growing link between derivatives market infrastructure and the convenience value of government debt.
I propose a theory where the demand for global safe assets plays a critical role in the occurrence of various types of monetary policy spillovers. Monetary shocks of a hegemon currency issuer determine portfolio allocation of risk-averse global banks, international capital flows, and by this way (1) production, (2) aggregate risk and (3) optimal monetary policy within a non-hegemon economy. Because of general equilibrium effects, (4) non-hegemon's monetary policy responses indirectly affect global bank's incentives to hold hegemon's goverment debt —i.e. the global safe asset— as well as hegemon's government welfare. This theory provides a novel framework that rationalizes and integrates various types of empirically documented monetary policy spillovers. Moreover, by shedding light on two-way spillovers, going both from the hegemon to the non-hegemon economy as well as the other way around, it also provides a headway on how to think potential gains of monetary policy cooperation. Understanding how the international demand for safe assets affects the international transmission of shocks is important for understanding the optimal design of monetary policy in an open economy.
We survey the literature on global capital allocation. We begin by reviewing the rise of cross-border investment, the shift toward portfolio investment, and the literature focusing on aggregate patterns in multilateral and bilateral positions. We then turn to the recent literature that uses micro data to document patterns in global capital allocations. We focus on the importance of the currency of denomination of assets in international portfolios and the role that tax havens and offshore financial centers play in intermediating global capital. We conclude with directions for future research in this area.