Foreign Holdings of U.S. Treasuries

and U.S. Treasury Yields

Daniel Beltran Maxwell Kretchmer

Jaime Marquez Charles Thomas

Federal Reserve Board

November 15, 2012

The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of

Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System.
Intro

Intro

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 2 / 37
Intro

Motivation

Rapid growth in foreign official holdings of Treasuries since 1994

China, Japan, and other EMEs have been channeling their savings

through the official sector, which has been acquiring foreign exchange

reserves, and investing a significant portion in U.S. Treasuries

Why should we care about this?

1 Effectiveness of monetary policy (e.g. Greenspan’s conundrum,

LSAPs?)

2 Clouding of signals extracted from movements in long-term interest

rates

Since 2007, purchases from EMEs are slowing

Smaller CA surpluses

Reserve diversification

⇒ How do foreign official purchases affect Treasury yields?

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 3 / 37
Intro

Rapid growth in global FX reserves

 0

 2

 4

 6

 8

 10

 12

1994 1996 1998 2000 2002 2004 2006 2008 2010

Trillions of dollars

 0.3

 0.4

 0.5

 0.6

 0.7

 0.8

 0.9

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

LSAP begins

Source: IMF

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 4 / 37
Intro

Rapid growth in foreign official holdings of LT Treas.

 0

 10

 20

 30

 40

 50

 60

1994 1996 1998 2000 2002 2004 2006

Percent

Foreign official holdings of Treas. securities / Treas. securities outstanding

Foreign private holdings of Treas. securities / Treas. securities outstanding

 0

 10

 20

 30

1994 1996 1998 2000 2002 2004 2006

Source: Treasury International Capital data

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 5 / 37
Intro

Growth mostly from EMEs

 0

 2

 4

1994 1996 1998 2000 2002 2004 2006 2008 2010

 40

 60

 80

Billions of dollars

Total foreign official inflows

Foreign official inflows into Treasuries & agencies

Foreign official inflows into Treasuries

monthly rate

 0

 1

 2

 3

 4

 5

1994 1996 1998 2000 2002 2004 2006 2008 2010

Trillions of dollars

Total (official+private) foreign holdings

Rest of world

Europe*

Oil exporters

Japan

Other EMEs

China

Source: Treasury International Capital data

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 6 / 37
Intro

Preference for longer-term Treasuries

Exhibit 3 07-11-11

Holdings as a share of outstanding

 20

 30

 40

 50

 60

 70

 80

1994 1996 1998 2000 2002 2004 2006

Percent

Foreign holdings of Treas. notes and bonds / notes and bonds outstanding

Foreign holdings of T-Bills. / T-Bills outstanding

 30

 40

 50

 60

Percent

Foreign official holdings of Treas. notes and bonds / notes and bonds outstanding

Foreign private holdings of Treas. notes and bonds / notes and bonds outstanding

Source: Treasury International Capital data

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 7 / 37
Intro

Goal

What is the overall effect of the global savings glut on U.S. yields

through high foreign savings that are invested in U.S. Treasuries by

the official sector?

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 8 / 37
Intro

Do foreign official purchases affect yields?

July 21, 2007, 7:00 a.m. (EST)

China announces that it will no longer peg its currency strictly to the

dollar (basket instead), and revalues renminbi slightly

Signal that China would not need to buy as many Treasuries

10-yr T-note yield jumps 7 b.p.

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 9 / 37
Intro

Empirically, a hard nut to crack

Two-way causality between prices and foreign demand

Foreign official investors may opportunistically sell Treasuries when

prices are high because of increased risk aversion on the part of private

investors

Long-term interest rates influenced by (typically unobservable)

forward looking variables (e.g. long-run inflation expectations)

Reaction of private investors

Changes in asset prices induced by shifts in foreign official demand may

be, in time, partially offset by the actions of private investors

Potential for “discovering” spurious relationships when fitting data in

levels

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 10 / 37
Intro

Exogenous flows?

Previous studies assume foreign governments do not optimize their

reserves portfolio

Two-thirds of central banks employ external managers

BIS surveys of central banks suggest that they behave much like

private asset managers

Care about liquidity, capital preservation, and returns

Respond to changes in asset prices and macroeconomic variables

Use value-at-risk methodologies to measure market risk, and

mean-variance portfolio diversification strategy

⇒ We treat foreign purchases of Treasuries as endogenous

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 11 / 37
Intro

Roadmap

1 Intro

2 Data

3 Regressions using the term premium

Short-term elasticity

Long-term elasticity

4 Regressions using realized excess returns

5 Comparison to other studies

6 Conclusion

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 12 / 37
Data

Data

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 13 / 37
Data

Basic notation

R

n

t = yield of n-period zero coupon bond at time t

rt ≡ R

1

t

(short rate)

P

n

t = price of n-period zero coupon bond at time t

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 14 / 37
Data

Measuring risk premia

Term premium for an n-year bond (ex-ante)

TP(n)

t ≡ R

(n)

t −

1

n

Xn−1

i=0

Et(rt+i)

| {z }

EH component

(1)

Excess holding period return realized at t + 1 (ex-post)

D

(6)

t+1 = ln

P

(5)

t+1

P

(6)

t

− rt. (2)

Use 5-year maturity

Close to average maturity of U.S. Treasury and agency securities held

by foreigners

Prices of 5-year Treasury notes are readily observed

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 15 / 37
Data

5-year term premium and future realized excess returns

 -4

 -2

 0

 2

 4

 6

1994 1996 1998 2000 2002 2004 2006

-10 

-5 

0 

5 

10 

15 

Percent Percent

Treasury 5-year term premium (right scale)

Treasury 6-year excess return realized 1 yr. ahead (left scale)

 -1

 0

 1

 2

 3

 4

1994 1996 1998 2000 2002 2004 2006

Source: D’Amico et al. (2010) and authors’ calculations

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 16 / 37
Data

Monthly TIC “S” data on foreign flows

Most comprehensive data source on foreign net purchases of U.S. LT

securities

Known problems with TIC S data

Undercounts official acquisitions through foreign intermediaries

Financial center bias

Warnock & Warnock (2009) use survey-adjusted S data

We perform an additional adjustment based on changes in custody

holdings at FRBNY

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 17 / 37
Data

Foreign official inflows into Treasury and agency securities

 -20

 0

 20

 40

 60

 80

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Billions of dollars

Total foreign official inflows

Foreign official inflows into Treasuries & agencies

Foreign official inflows into Treasuries

monthly rate

 0

 1

 2

1994 1996 1998 2000 2002 2004 2006 2008 2010

Note: 6-month moving average. Source: Treasury International Capital data

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 18 / 37
Data

Estimation sample

Benchmark sample: monthly data from January 1994 to June 2007

Financial crisis events would likely obscure the relations we care about

Lehman, AIG, TARP, European crisis, Large Scale Asset Purchases

(LSAP)

As a robustness check, use sample that ends in June 2011

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 19 / 37
Data

Other explanatory variables

Implied vol. of options on U.S. and German 5-yr sovereign note

futures

Liquidity premium (difference between the synthetic off-the-run and

on-the-run five-year Treasury note yields)

VIX index of stock market volatility (correlated with flight-to-safety

flows and dollar appreciations)

Year-over-year percent change in industrial production

VAR estimates of exogenous oil-specific demand shocks using the

data from Kilian (2009)

U.S. federal government budget balance

Cochrane and Piazessi (2005) factors, linear combinations of forward

rates

Credit Suisse global risk appetite measure

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 20 / 37
Data

Instruments for foreign official flows

Foreign exchange interventions by Japan’s Ministry of Finance

Exogenous oil-specific supply shocks from a VAR (Kilian (2009))

Sum of Chinese trade balance and direct investment inflows

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 21 / 37
Regressions using the term premium Short-term elasticity

Short-term elasticity

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 22 / 37
Regressions using the term premium Short-term elasticity

Regressions using the term premium

Effect on 5-year

yield of $100

bn foreign

official inflow =

-46 to -50 bp

(1) (2) (3) (4) (5)

OLS: IV: 1st Stage IV: 2nd Stage IV: 1st Stage IV: 2nd Stage

ΔTP t ΔFOI t / DEBT t-1 ΔTP t ΔFOI t / GDP t-1 ΔTP t

Flow Variables

ΔFOI t / DEBT t-1 0.052* -0.135**

(0.030) (0.061)

ΔFPVT / DEBT t-1 0.046** -0.026 0.041

(0.021) (0.052) (0.027)

ΔFOI t / GDP t-1 -0.696**

(0.343)

ΔFPVT / GDP t-1 0.017 0.182*

(0.053) (0.110)

Control Variables

ΔIP t

yoy 0.025* 0.005 0.027* 0.000 0.026*

(0.013) (0.033) (0.014) (0.008) (0.015)

ΔIP t-1

yoy -0.033** 0.010 -0.033** 0.004 -0.031**

(0.013) (0.033) (0.015) (0.008) (0.015)

ΔVIX t -0.007** -0.017** -0.010*** -0.004** -0.011***

(0.003) (0.007) (0.003) (0.002) (0.003)

ΔVIX t-1 -0.001 -0.017** -0.005 -0.004*** -0.005

(0.003) (0.007) (0.003) (0.002) (0.003)

ΔUS_VOL t-1 0.019 0.018 0.018 0.006 0.021

(0.020) (0.052) (0.022) (0.012) (0.022)

ΔDE_VOL t 0.011 -0.056 0.006 -0.015 0.003

(0.026) (0.068) (0.028) (0.016) (0.030)

ΔSTR_BUDGET_BALANCE t 0.089** -0.235** 0.023 -0.042* 0.020

(0.040) (0.101) (0.042) (0.023) (0.043)

ΔLP5 t-1 -0.005 0.002 -0.004 0.000 -0.005

(0.004) (0.010) (0.004) (0.002) (0.004)

OIL_DEMAND_SHOCK t 0.010 -0.026 0.005 -0.006 0.004

(0.010) (0.026) (0.011) (0.006) (0.012)

ΔCP 1-5

t-1 0.035* -0.058 0.025 -0.014 0.022

(0.020) (0.051) (0.024) (0.012) (0.025)

ΔCP 6-9

t-1 0.018*** -0.010 0.016** -0.002 0.016**

(0.006) (0.015) (0.006) (0.004) (0.007)

Instruments

JPYFXINT t 0.016*** 0.003***

(0.003) (0.001)

OIL_SUPPLY_SHOCK t 0.070 0.016

(0.045) (0.011)

Observations 160 160 160 160 160

R-squared 0.266 0.447 0.070 0.342 0.013

Durbin-Watson 1.802 1.488 1.441

Cragg-Donald Wald F-Stat 15.72 9.894

Weak instrument test, critical value1 11.59 11.59

Pagan-Hall Test (P-Value) 0.671 0.789

Cumby-Huizinga Test (P-Value) 0.0159 0.0158

Endogeneity Test (P-Value) 0.0192 0.0339

Hansen J Test (P-Value) 0.3498 0.3147

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 23 / 37
Regressions using the term premium Short-term elasticity

Alternative IV specifications

Effect on 5-year

yield of $100

bn foreign

official inflow =

-48 to -50 bp

(1) (2) (3) (4) (5)

IV: IV: IV: IV: IV:

ALL ALL MID-EAST OIL

COUNTRIES COUNTRIES JAPAN CHINA EXPORTERS

First Stage: Instruments

JPYFXINT t 0.019*** 0.019*** 0.017***

(0.003) (0.003) (0.002)

ΔBOP_CN t 0.006 0.007 0.006**

(0.006) (0.006) (0.002)

OIL_SUPPLY_SHOCK t 0.061 0.019**

(0.051) (0.008)

Second Stage: Official Flows

ΔFOI t / DEBT t-1 -0.140** -0.145**

(0.057) (0.058)

ΔFOI_JAPAN t / DEBT t-1 -0.147**

(0.059)

ΔFOI_CHINA t / DEBT t-1 0.207

(0.423)

ΔFOI_MIDEAST t / DEBT t-1 -0.000

(0.862)

Observations 126 126 160 126 160

R-squared - 2nd Stage 0.106 0.095 0.210 0.305 0.254

Cragg-Donald Wald F-Stat 18.25 12.71 97.59 6.053 6.119

Weak instrument test, cricial value1 11.59 12.83 8.96 8.96 8.96

Endogenous Variables 1 1 1 1 1

Exogenous Instruments 2 3 1 1 1

Pagan-Hall Test (P-Value) 0.862 0.890 0.429 0.539 0.545

Cumby-Huizinga Test (P-Value) 0.138 0.127 0.0169 0.387 0.192

Endogeneity Test (P-Value) 0.00932 0.00882 0.0229 0.925 0.408

Hansen J Test (P-Value) 0.9074 0.9013 n.a. n.a. n.a.

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 24 / 37
Regressions using the term premium Short-term elasticity

Alternative IV specifications using Treas. & agencies

Effect on 5-year

yield of $100

bn foreign

official inflow =

-43 to -70 bp

(1) (2) (3)

IV: IV: IV:

ALL ALL ALL

COUNTRIES COUNTRIES COUNTRIES

First Stage: Instruments

JPYFXINT t 0.002*** 0.003*** 0.003***

(0.001) (0.001) (0.001)

ΔBOP_CN t 0.004** 0.004**

(0.002) (0.002)

OIL_SUPPLY_SHOCK t 0.008

(0.012)

Second Stage: Official Flows

ΔFOI_TA t / GDP t-1 -0.983** -0.606 -0.637*

(0.489) (0.382) (0.385)

Observations 160 126 126

R-squared - 2nd Stage n.a. 0.116 0.100

Cragg-Donald Wald F-Stat 7.829 10.29 6.950

Weak instrument test, critical value1 8.96 11.59 12.83

Endogenous Variables 1 1 1

Exogenous Instruments 1 2 3

Pagan-Hall Test (P-Value) 0.850 0.847 0.878

Cumby-Huizinga Test (P-Value) 0.0101 0.201 0.185

Endogeneity Test (P-Value) 0.0433 0.0661 0.0577

Hansen J Test (P-Value) n.a. 0.3486 0.5437

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 25 / 37
Regressions using the term premium Long-term elasticity

Long-term elasticity

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 26 / 37
Regressions using the term premium Long-term elasticity

Cointegrated VAR approach

Differentiate between short-run and long-run dynamics

Recognize interdependencies between foreign holdings and term

premium

Endogenous variables: term premium, foreign official holdings, foreign

private holdings

Exogenous variables: industrial production, U.S. and German volatility

of 5-yr note futures, VIX

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 27 / 37
Regressions using the term premium Long-term elasticity

VAR long-run coefficients (-17 to -20 bp effect)

12 lags 6 lags 2 lags 1 lag

Cointegrating vector, β

1

Term premium (normalized) 1 1 1 1

Foreign official 0.046 0.062 0.055 0.063

Foreign private 0.061 0.05 0.037 -0.001

T-stat - cointegration coef.

Foreign official 5.782 4.633 3.403 3.866

Foreign private 2.883 1.521 0.952 -0.033

Loading Factors, α

2

Term premium -0.481 -0.21 -0.186 -0.216

Foreign official -0.54 -0.295 -0.153 -0.224

Foreign private 0.096 0.23 -0.017 0.08665

T-stat. - loading factors

Term premium -5.831 -4.559 -5.129 -4.957

Foreign official -2.378 -2.288 -1.442 -2.522

Foreign private 0.274 1.219 -0.113 0.633

Criteria for lag selection

Schwarz 4.07 2.74 1.97 1.88

Hannan-Quinn 2.61 1.94 1.6 1.6

Akaike 1.6 1.4 1.34 1.42

Residual tests (p-values)

Serial Independence30.58 0.61 0.1 0

Normality40.55 0.49 0.04 0.09

Homoskedasticity50.26 0.72 0.16 0.01

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Regressions using realized excess returns

Regressions using realized excess returns

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 29 / 37
Regressions using realized excess returns

A priori-hypothesis

Foreign flows during the holding period increase realized excess

returns at the end of the holding period

D

(6)

t+1 = ln

P

(5)

t+1

P

(6)

t

− rt.

Time: t t+1

Borrow funds for 1 year to Sell 6-year bond

purchase 6-year Treasury bond as a 5-year bond

and pay off loan.

1-year holding period:

Foreign flows and other explanatory 

variables observed

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 30 / 37
Regressions using realized excess returns

Excess returns regressions

Effect on 5-year

yield of $100

bn foreign

official inflow =

-42 bp

(1) (2) (3) (4) (5)

OLS: IV: 1st Stage IV: 2nd Stage IV: 1st Stage† IV: 2nd Stage†

XR_6 t Σ12FOIt / DEBT t-12 XR_6 t Δ(Σ 12 FOIt / DEBT t-12 ) ΔXR_6 t

Flow Variables

Σ12FOIt / DEBT t-12 0.172 0.595*** 0.424

(0.119) (0.184) (0.545)

Σ12FPVT t / DEBT t-12 0.656*** 0.056 0.616*** -0.036 -0.723***

(0.144) (0.067) (0.137) (0.053) (0.251)

Control Variables

IP t

yoy -0.942*** 0.198 -0.988*** -0.031 -0.282

(0.330) (0.154) (0.317) (0.074) (0.328)

IP t-1

yoy 0.293 -0.246 0.303 -0.093 0.106

(0.321) (0.150) (0.310) (0.073) (0.336)

VIX t 0.156*** -0.047* 0.175*** -0.019* 0.139***

(0.057) (0.027) (0.044) (0.011) (0.049)

DE_VOL t -0.361 -0.704*** -0.155 -0.037 -0.730*

(0.491) (0.251) (0.524) (0.097) (0.427)

US_VOL t-1 0.026 -0.409*** -0.095 0.073 -0.514*

(0.315) (0.155) (0.300) (0.069) (0.312)

LP5 t-1 0.001 -0.069* 0.040 -0.010 0.035

(0.081) (0.038) (0.084) (0.015) (0.070)

Σ 12 OIL_DEMAND_SHOCKt -0.297*** -0.063 -0.261*** -0.010 -0.061

(0.112) (0.056) (0.095) (0.037) (0.164)

CP 1-5

t-13 2.266*** -0.259 2.601*** 0.059 -0.147

(0.380) (0.176) (0.428) (0.068) (0.294)

CP 6-9

t-13 0.423*** -0.052 0.395*** 0.006 0.048

(0.143) (0.067) (0.144) (0.023) (0.111)

RISK APPETITEt -0.494*** -0.050 -0.484*** -0.046 -0.501**

(0.124) (0.058) (0.106) (0.048) (0.198)

Σ 12 STR_BUDGET_BALt /GDP t-12 0.168 -0.730*** 0.627** -0.101 -0.549

(0.310) (0.145) (0.284) (0.182) (0.892)

Instruments

Σ 12 JPYFXINT 0.025*** 0.024***

(0.002) (0.003)

Σ 12 OIL_SUPPLY_SHOCKt 0.239*** 0.051

(0.057) (0.040)

Observations 158 158 158 158 158

R-squared 0.784 0.915 0.765 0.365 0.104

Durbin-Watson 1.326 0.421 1.486

Cragg-Donald Wald F-Stat 92.79 32.77

Weak instrument test, critical value1 11.59 11.59

Pagan-Hall Test (P-Value) 0.224 0.928

Cumby-Huizinga Test (P-Value) 6.84e-06 0.0970

Endogeneity Test (P-Value) 5.01e-06 0.00374

Hansen J Test (P-Value) 0.3563 0.3902

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 31 / 37
Comparison to other studies

Comparison to other studies

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 32 / 37
Comparison to other studies

Comparison of estimates of effects of purchases on

Treasury yields

Basis points

per 100 Investor Data

$billion type frequency

Short-run “flow” effect

1. This study: Term-premium regs. -46 to -50 For. Off. Monthly flows

2. D’Amico and King (2011) -67 Fed Daily purchases

3. Bernanke et al. (2004) -66 Jpn. Official Daily interventions

4. McCauley and Jiang (2004) -70 to -100 For. Off. Weekly flows

Medium-run “flow” effect

1. This study: Excess returns regs. -39 to -62 For. Off. 12-month flows

2. Warnock and Warnock (2009) -68 For. Off. 12-month flows

3. Rudebusch et al. (2006) no effect For. Off. 12-month flows

Long-run “stock” effect

1. This study: Cointegration -17 to -20 For. Off. Holdings (level)

2. Bertaut et al. (2011) -11 to -15 For. Off. Holdings (level)

3. Gagnon et al. (2011) -2 to -5 Fed Cumulated purchases

4. D’Amico and King (2011) -10 Fed Cumulated purchases

5. Hamilton and Wu (2011) -4 Fed Cumulated purchases

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 33 / 37
Comparison to other studies

LSAP purchases vs. foreign official purchases

LSAPs are temporary

LSAPs may increase inflation risk premium

Expectations of future LSAPs move with economic fundamentals,

hard to measure

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 34 / 37
Conclusion

Conclusion

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 35 / 37
Conclusion

Conclusion, I

Foreign official inflows into Treasury notes respond to such things as

implied volatility of U.S. and German bonds, liquidity premium,

structural budget deficit, and implied stock market volatility (VIX)

Short-run effect ranges from -40 bp to -60 bp per $100bn

Long-run effect roughly -20 bp

Estimates using 1994-2011 sample period imply slightly lower effects

Between 1995 and 2000 China acquired roughly $1.1 trillion in

Treasuries

Absent these flows, our estimates suggest that, all else equal, 5-yr

yields would be roughly 2 percentage points higher

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 36 / 37
Conclusion

Conclusion, II

We estimated the “average” effect over the last few decades

But true effect of a large sale of U.S. Treasuries by a foreign official

investor would depend on the timing and magnitude of sales

Sudden, unexpected dumping of massive amounts of Treasuries could

disrupt market functioning

Behavior of private investors would depend on perceived safe-haven

status

Our results likely overstate the effect of reserve diversification (e.g.

from Treasuries into Bunds)

Beltran/Kretchmer/Marquez/Thomas (Fed) Foreign holdings & Treasury Yields November 15, 2012 37 / 37