Are U.S. Treasuries Still “Convenient”?

In recent years, the perception of U.S. Treasuries as a secure investment has come under scrutiny. Traditionally considered the gold standard for safety, clarity, and liquidity, the recent data indicates a shift in the convenience yield associated with U.S. Treasury securities. In a thorough analysis by Julian Kozlowski and Nicholas Sullivan, the question arises: are U.S. Treasuries still “convenient”?

The Concept of Convenience Yield

The convenience yield of U.S. Treasuries is defined as the extra value investors attribute to these bonds beyond their cash flow's present value. It encapsulates the added liquidity and safety that Treasuries provide. A higher convenience yield generally translates to lower interest payments for government debt and a source of seigniorage for the U.S. Treasury. However, recent trends suggest a noticeable reduction in this yield, particularly for long-maturity spreads, which could have significant implications for investors.

Decline in the AAA-UST Spread

The AAA-UST spread, which measures the difference in yield between AAA-rated corporate bonds and U.S. Treasuries, is a critical indicator of convenience yield. This spread provides insight into the relative attractiveness of Treasuries compared to corporate bonds. Historically, the option-adjusted spread of the ICE BofA AAA U.S. Corporate Index averaged 67 basis points from 2012 to 2019. However, by October 8, 2025, this spread had compressed to just 30 basis points, revealing a significant tightening in the perceived safety and liquidity associated with U.S. Treasuries.

This contraction can be understood through several contributing factors, including an increase in the supply of Treasuries influenced by a rising debt-to-Gross Domestic Product ratio. Over the same period, the average spread notably decreased, which suggests that investors are valuing U.S. Treasuries less compared to their corporate counterparts despite the latter's historically lower liquidity.

Swap Spreads: A Deeper Dive

Another useful measure of convenience yield is the swap spread, reflecting the difference between maturity-matched swap rates and Treasury yields. Recent examinations by notable researchers, including Zhengyang Jiang, Robert J. Richmond, and Tony Zhang, have illustrated a significant decline in swap spreads, particularly for longer maturities. This trend highlights the evolving dynamics within the fixed income market, where traditional benchmarks are being challenged.

For instance, as of September 24, 2025, one-year swap spreads were recorded at 16 basis points, while five-year and ten-year spreads experienced a more dramatic decline, with respective spreads of -13 and -26 basis points. This trend underscores a growing divergence between risk perceptions in the market and the government’s perceived risk-free rates.

The Box Spread: Implicit Risk-Free Rates

The box spread example affords additional insight. Following the methodology of van Binsbergen, Diamond, and Grotteria, the implied risk-free interest rate derived from options data on the S&P 500 mirrors perceptions of U.S. Treasuries' convenience yield. As the box spreads narrowed from an average of 34 basis points in 2012-2019 to just 9 basis points in 2025 for the 18-month spread, it accentuates the evolving investor sentiment toward safer investments.

The data strongly suggests a lessened demand for Treasuries correlating to increasing fiscal deficits and higher government debt levels. The narrowing box spreads effectively reflect how investors’ assessments of risk-free assets are realigning in a changing economic landscape.

Illustrating the Changes in Yield Metrics

The observed trends in the U.S. Treasury convenience yield understandably raise important questions regarding future investment strategies. As illustrated in various metrics:

• Average AAA-UST spread has decreased from 67 basis points (2012-2019) to 36 basis points by 2025.
• 10-year swap spreads now register at -26 basis points, a stark shift from previously positive territory.
• The average box spread for 18-month maturities has collapsed to 9 basis points from 34, emphasizing decreasing investor confidence in government securities.

These data points paint a comprehensive picture of changing market dynamics and investor psychology, suggesting that prevailing economic conditions may not favor traditional safe-haven assets like Treasuries.

What Lies Ahead for U.S. Treasuries?

For investors, the implications surrounding U.S. Treasuries warrant close attention. The reduced convenience yield, particularly for longer-maturity spreads, suggests that Treasuries are providing less safety and liquidity in an environment characterized by heightened fiscal deficits and government debt accumulation. With long-term yields trending upwards amidst these prevailing conditions, investors must reassess their positions concerning Treasury securities.

Merely viewing U.S. Treasuries as a default safe investment may no longer be the prudent strategy given these shifts. A dynamic reassessment of investment portfolios, taking into account the broader market conditions and the changing environment surrounding government debt, is imperative for maximizing returns and mitigating risks.