Official Demand for U.S. Debt: Implications for U.S. Real Interest Rates
47 Pages Posted: 15 May 2014
Date Written: April 2014
Abstract
By constructing and estimating a structural arbitrage-free model of demand pressures on US real rates, we find that recent purchases of US government debt securities by the Fed and foreign officials have significantly affected the level and the dynamics of US real rates. In particular, by 2008, foreign purchases of US Treasuries are estimated to have had cumulatively reduced long term real yields by around 80 basis points. The subsequent total impact of Fed purchases in 2008-2012 has been even larger: the quantitative easing (QE) has depressed real 10-year yields by around 140 basis points. Our findings also reveal that the Fed policy interventions and foreign official purchases affect longer term real bonds mostly through a reduction in the bond premium.
Keywords: Bonds, United States, Demand, Interest rates, Foreign investment, Bond markets, Economic models, Term structure of interest rates, Large Scale Asset Purchases (LSAP), real yield curve, Bayesian estimation, international reserves, treasury bond, bond yields, bond prices, financial markets, indexed bonds, government bonds, bond returns, term bond, financial systems, domestic financial systems, long-term bond yields, treasury bonds, term bonds, hedging, international capital, bond premium, supply of bonds, bond purchases, financial intermediaries, interest rate policy, long-term bonds, treasury bond yields, interest rate risk, zero-coupon bonds, corporate bond, short-term bonds, bond portfolio,
JEL Classification: G10, F31
Suggested Citation: Suggested Citation