• Specialness without Safety: Convenience Yields in Risky Sovereign Bonds

I study how financial regulation can generate convenience yields in risky local-currency sovereign bonds by granting them a privileged role in bank's capital regulation.

Abstract:

Sovereign bonds can have convenience yields without necessarily being safe assets. This paper shows that local-currency sovereign bonds in thirteen emerging market economies contain a convenience yield component associated with their privileged status under domestic bank capital regulation: a regulatory convenience yield. I measure this component as the difference between the yield on a derivative-based synthetic benchmark and the observed sovereign zero-coupon yield. Absent financial frictions, the benchmark matches the bond’s maturity, currency denomination, and sovereign default risk but does not provide its regulatory benefits. I formalize the mechanism in a model in which, when banks' balance-sheet constraint binds, they place greater value on bonds that receive preferential regulatory treatment and therefore accept lower yields on them. In panel regressions, the convenience yield proxy rises by about ten basis points for each one-percentage-point reduction in the distance between the banking system's capital adequacy ratio and its regulatory threshold, and the estimates imply an average regulatory convenience yield component of approximately 27 basis points. The results show how preferential treatment under bank capital regulation can generate convenience yields in risky sovereign bonds and reduce domestic governments' borrowing costs.

Presented at: 2026 Summer PhD Conference - McGill University, 2026 UQAM PhD Colloquium in Finance, 2026 Joint-PhD Symposium (Montreal), 2025 Joint-PhD Symposium (Montreal)

Previous Non-Finance Publications

• Holographic Entanglement Entropy in Time Dependent Gauss-Bonnet Gravity

with E. Caceres & J. Virrueta

Journal of High Energy Physics, 2017, 2017(9), 1-24

• Noise-assisted Quantum Electron Transfer in Photosynthetic Complexes

with A. Nesterov, G. Berman & R. Sayre

Journal of Mathematical Chemistry, 2013, 51(9)