The Liquidity and Welfare Implications of the Securities Lending Market for European Treasuries

The growing demand for high quality liquid assets in the securities lending market gave rise to a new form of convenience yield for German treasuries as shown by the significantly higher auction prices and lower yields for bonds with higher expected lending income in the primary and secondary market. Pension funds and insurance firms could capitalize on this demand to generate additional revenues on their large low yield treasury portfolios. At year-end, with the banks’ withdrawal from the market, additional opportunities arise for nonbank lenders to become primary lenders and earn higher fees while providing the much needed funding liquidity.

JEL classification: G12, G18, G21, G23
Keywords: Bond yields, Convenience yield, Collateral, Central counterparty, Pension funds, Wealth preservation, Securities lending.