What makes a safe asset?

Interesting paper by ECB econs:

There is growing academic and policy interest in so called “safe assets”, that is assets that have stable nominal payoffs, are highly liquid and carry minimal credit risk. They are particularly valuable during periods of stress in financial markets, as they maintain their nominal value while the value of other assets typically falls. In order to hold such assets, investors are typically willing to pay a premium, often referred to as “convenience yield”, a term usually used with reference to US Treasuries.

We study what makes government bonds a safe asset. Building on a sample of monthly changes in government bond yields in 40 advanced and emerging
countries, we analyse the sensitivity of yields to country specific fundamentals interacted with changes in global risk (VIX). We find that inertia (whether
the bond behaved as a safe asset in the past) and good institutions foster a safe asset status, while the size of the debt market is also significant, reflecting
the special role of the US. Within advanced and emerging markets, drivers are heterogeneous, with external sustainability in particular being relevant for the
latter countries after the global financial crisis. Finally, the safe asset status does not appear to depend on whether the change in global risk is driven by
financial shocks rather than by US monetary policy.


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