Bond Convenience Yields in the Eurozone Currency Union

In a monetary union, the risk-free rate cannot respond to country-level fiscal shocks, leaving only default spreads and convenience yields to respond. Empirically, we find that convenience yields play an important role as fiscal shock absorbers in the Eurozone. Consistent with downward-sloping demand for safety, Eurozone countries earn larger convenience yields after they release positive fiscal news. Since convenience yields generate substantial seigniorage revenue from debt issuance, our estimates imply economically large fiscal costs from low convenience yields for peripheral countries in the Eurozone.