This paper examines how demand for government bonds jointly affects bond yields and exchange rates. Exploiting government bond auctions from advanced economies to isolate demand shocks, I identify two channels: the risk premium channel, which reduces both bond and currency risk premiums, and the convenience yield channel, which increases the value of domestic safe assets. While both channels suppress yields, they have opposing effects on exchange rates. A preferred-habitat model featuring pref- erence for liquidity demonstrates these mechanisms. The model predicts that higher auction demand lowers yields and strengthens the domestic currency by raising convenience yields. Empirical results validate these predictions. The standard positive yield-exchange rate relation, primarily driven by the risk premium channel, dampens during auctions as bond yields increasingly reflect convenience yields. These findings highlight the pivotal role of liquidity preferences in the joint dynamics of government bonds and exchange rates.