. s. bond portfolios do not indicate a worrisome pickup in risk - taking in external investments. but it is important to recognize that portfolio reallocations that seem relatively small for u. s. investors can loom large from the perspective of the foreign recipients of these flows. at roughly $ 400 billion at the end of 2012, emerging market bonds accounted for a tiny fraction of the roughly $ 25 trillion in bonds held by u. s. investors. but to the recipient countries, these holdings can account for a large fraction of their bond markets. even relatively small changes in these u. s. holdings can generate large asset price responses, as was certainly the case in the summer of 2013. likewise, a reassessment of risk - return tradeoffs could disrupt financing for projects that are dependent on the willingness of investors to participate in global syndicated loan markets. we take the consequences of such spillovers seriously, and the federal reserve is intent on communicating its policy intentions as clearly as possible in order to reduce the likelihood of future disruptions to markets. we will continue to monitor investor behavior closely, both domestically and internationally. see carol bertaut and alexandra tabova ( 2014 ), “ reach for yield versus search for safety, ” unpublished paper, board of governors of the federal reserve system. see carol bertaut, alexandra tabova, and vivian wong ( 2014 ), “ the replacement of safe assets : evidence from the u. s. bond portfolio ( pdf ), ” international finance discussion papers 1123 ( washington : board of governors of the federal reserve system, october ). bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches

va., september 18 – 19, and seung jung lee, lucy qian liu, and viktors stebunovs ( 2014 ), “ risk - taking and interest rates : evidence from decades in the global syndicated loan market, ” unpublished paper, board of governors of the federal reserve system. see jerome h. powell ( 2013 ), “ advanced economy monetary policy and emerging market economies, ” speech delivered at the federal reserve bank of san francisco 2013 asia economic policy conference, san francisco, november 4. see shaghil ahmed and andrei zlate ( 2013 ), “ capital flows to emerging market economies : a brave new world? “ international finance discussion papers 1081 ( washington : board of governors of the federal reserve system, june ) ; david bowman, juan m. londono, and horacio sapriza ( 2014 ), “ u. s. unconventional monetary policy and transmission to emerging market economies, ” international finance discussion papers 1109 ( washington : board of governors of the federal reserve system, june ) ; and marcel fratzscher, marco lo duca, and roland straub ( 2013 ), “ on the international spillovers of u. s. quantitative easing ( pdf ), ” ecb working paper series 1557 ( frankfurt, germany : european central bank, june ). bis central bankers ’ speeches ex post, these portfolio reallocations delivered a higher return to u. s. investors on this part of their portfolio relative to what they would have received if they had left portfolio compositions unchanged at the average shares in 2008 and 2009, but at a cost to the portfolio ’ s credit quality ( figure 6 ). regression results confirm that in choosing among foreign government bonds, u. s. investors have put more weight on returns since the crisis. 6 but search for higher returns has not been the only motivation for international investors post - crisis : demand for liquid high - grade “ safe ” or money - like assets has also increased from foreign official investors for investment of foreign exchange reserves, from pension funds and other institutions who face portfolio allocation constraints or regulatory requirements, and from investment strategies requiring cash - like assets for margining and other collateral purposes. some shift to safe assets is also seen in u. s. portfolios : u. s. investors actively rebalanced their holdings of foreign financial sector bonds toward those with higher credit ratings, but at some cost in returns ( figure 7 ; figure 8 ). 7 taken together, developments in u