of a short - term impact of large purchases and sales - - the result of limits to liquidity in the very short run - - than to the perhaps more important question of whether those transactions have a lasting effect on yields. on this latter issue, clear evidence is harder to come by. several pieces of indirect evidence suggest that the long - term effect of foreign purchases on yields may be moderate. notably, the global market for dollar - denominated bonds is enormous - - perhaps around $ 25 trillion, including dollar - denominated debt issued by other countries as well as debt issued abroad by u. s. residents. in the long run, therefore, the market should be able to absorb purchases and sales of large absolute magnitude with relatively modest changes in yields. indeed, long - term yields continued to fall over recent quarters even as foreign official holdings of treasury securities increased at a slower pace than previously. don h. kim and jonathan h. wright ( 2005 ), " an arbitrage - free three - factor term structure model and the recent behavior of long - term yields and distant - horizon forward rates, " finance and economics discussion series 2005 - 33 ( washington : board of governors of the federal reserve system, august ). ben s. bernanke ( 2004 ), " the great moderation, " speech delivered at the meetings of the eastern economic association, washington, d. c., february 20. ben s. bernanke, brian p. sack, and vincent r. reinhart ( 2004 ), " monetary policy alternatives at the zero bound : an empirical assessment, " brookings papers on economic analysis ( 2 ), pp. 1 - 100. the performance of treasuries relative to that of other fixed - income instruments also argues against a dominant influence of foreign official portfolio decisions on long - term rates. if foreign official holdings of treasuries were the source of the decline in their yields, then we would expect to observe increased spreads between yields on treasury securities and the returns to other types of debt less favored by foreign official holders. but we have not seen a significant widening of private yield spreads relative to treasuries - - quite the contrary - - and, as i noted earlier, yields in other industrial economies have fallen as well, in many cases by more than u. s. yields. a reasonable conclusion is that the accumulation of dollar reserves abroad has influenced u. s. yields, but reserve accumulation abroad is not the only, or

100 percent in 1990 to over 400 percent today. that change reflects the fact that an increasingly large share of the world ’ s wealth is invested abroad, much of it in u. s. debt, including treasury securities. the rise in foreign official and private purchases of treasury securities resulted in an increase in the price of u. s. treasury securities, driving down yields. the second factor causing demand for treasury securities to grow more than supply was the large buildup of official reserves that started after the reforms that followed the 1998 financial crisis in asia. one consequence of removing capital controls and other financial market liberalization in other countries over the past 30 years has been - 8to make foreign governments more vulnerable to sudden capital outflows and financial crises. many countries have responded by building up their foreign exchange reserves to help weather such stress. global foreign exchange reserves have increased from around $ 1 trillion in the early 1990s to $ 12 trillion today. notwithstanding the drumbeat of warnings from some that the u. s. dollar is in danger of losing its primacy in global trade and finance, it remains by a very large margin the world ’ s reserve currency. u. s. government debt, likewise, remains the primary form of low - risk asset, which is reflected in the huge stock of treasury securities held as foreign exchange reserves around the world. the resulting demand for treasury securities has contributed to pushing down yields and, thus, lowering r *. the third factor driving prices up and yields down for treasuries and similarly affecting r * is sovereign wealth funds. in addition to foreign exchange reserve holdings, sovereign wealth funds from some economies, especially those rich in natural resources, have become an increasingly important way for governments to invest abroad and diversify their national wealth. they are an increasingly significant force in global financial markets. although sovereign wealth funds are diverse in their holdings, u. s. government debt is typically a sizable share of these funds. sovereign wealth funds have grown from $ 1 trillion in assets in 2000 to $ 11 trillion last year, and a lot of those assets are presumably in u. s. treasuries. for example, norway ’ s sovereign wealth fund holdings of treasuries grew from $ 5. 6 billion to $ 132. 4 billion over this period. 8 the growth in treasury holdings by sovereign wealth funds has clearly contributed to the decline in treasury yields. see global swf ’ s website at https : / / globalswf. com. - 9the fourth