Safe government bonds enjoy a discount known as the convenience yield. When a government issues more debt, it erodes this discount for itself and for other countries – a fiscal externality that incentivises excessive debt issuance. But safe asset issuers also have market power, and thus incentives to reduce issuance to boost the convenience yield and extract rents from foreign bondholders. This column studies these distortions under non-cooperative fiscal policy. Over the past decade, the fiscal externality has dominated in the euro area, fostering over-issuance of safe sovereign debt. This calls for fiscal coordination and restraint even absent debt sustainability concerns.



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