Safe Asset Migration, July 2019.
Post-crisis reforms changed the location of safe asset production. I propose a pair of tests to identify who issues safe assets and which safe asset issuers opportunistically time issuance when the price of safe assets is high. Federal agency issuance both (1) responds to day-to-day fluctuations in demand for safe assets—measured via the convenience yield—and (2) is an important determinant in the subsequent price of safe assets. Agencies issue more the day after an unexpected increase in the convenience yield, and an unexpectedly large agency issue decreases the convenience yield the next day. This paper measures the convenience yield three ways: the GCF Repo-Tbill spread, OIS-Tbill spread, and a measure of tails derived from Treasury auctions and the when-issued market. The Federal Home Loan Bank system is a newly crucial safe asset producer. The FHLBs’ ability to produce safe assets depends on their implicit government backing.