Agenda

F O R E I G N H O L D I N G S O F U S T R E A S U R I E S A N D T R E A S U R Y 

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November 2012

S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L Terry Belton AC AC Indicates certifying analyst. See last page for analyst certification and important disclosures.
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Term premium estimates from arbitrage-free pricing models have sigmeasurement errors; they tend to attribute most of the variability in inchanges in term premium

5Y forward OIS vs. Kim-Wright expected 5Y forward spot; %

F O R E I G N H O L D I N G S O F U S T R E A S U R I E S A N D T R E A S UR

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FOMC rate guidance has had a large impact on forwards but little imprate expectations derived from arbitrage-free pricing models

Kim-Wright expected short rate vs. forward OIS around FOMC rate guidance 5-year Treasury yields vs. Kim-Wr

term premium; % 

F O R E I G N H O L D I N G S O F U S T R E A S U R I E S A N D T R E A S UR

Business days around FOM C meetings where rate guidance was extended** includes 8/9/11, 1/25/12, 9/13/12

 Would advise caution in interpreting term premium estimates too literally Econometric model s of term premium may need to control for growth/inflation 

factors that predominantly influence short rate expectations 

 Failure to properly account for declining short rate expectations since 2009 ha

term premium estimates significantly negative

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Estimates of yield impact of foreign buying are smaller than they appe

Average monthly foreign purchases of UST versus monthly Treasury supply Estimated impact of Fed LSAP

406080

100120

Tsy supplyForeign purchases

Study Hamilton and Wu Krishnamurthy and Vissing-Jorgensen D'Amico and King (QE1) 

F O R E I G N H O L D I N G S O F U S T R E A S U R I E S A N D T R E A S U R

 $100 bn in monthly purchases is more than 5 times monthly supply of Treasuries 

studied

 Estimates imply an increase of foreign purchases during 2002-2007 equal to tota

lowered yields only 9 bp

 These estimates are well under one half the estimated impact from QE; Fed buy

50% of monthly supply in QE1 to almost 100% of monthly supply in QE2

0

20

40

2002-2007 2007-2012

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