Official Demand for U.S. Debt: Implications for U.S. Real Interest Rates

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.

A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt

“…A very different perspective is provided byKaminska and Zinna (2014), who estimate a no-arbitrage model of TIPS using official foreign and Fed bond demand as a pricing factor. They find steep cyclically-insensitive declines over the past two decades in the long-run real term premium-from 2 to -2 percent-and relatively stable expected future short rates.…”

Factors behind the Decline in Real Long-Term Government Bond Yields

“…Warnock and Warnock (2009) show that foreign official investors pushed down US nominal government bond yields by 80 basis points from the mid-1980s to around 2005. Similarly, Kaminska and Zinna (2014) find that such interventions reduced real long-term government bond yields between 2001 and 2008 by 80 basis points. 9…”

“…This problem is addressed by approaches based on structural models of demand for government bonds, which could be treated as stock effects. For instance, in the United States, Kaminska and Zinna (2014) find that QE measures in 2009-12 lowered 10-year real US government bond yields by around 140 basis points (i.e. 13 basis points for purchases of 1% of 2009 GDP).…”

Do demographic changes matter? A cross-country perspective

“…Warnock and Warnock (2009) show that foreign official investors pushed down US nominal government bond yields by 80 basis points from the mid-1980s to around 2005. Similarly, Kaminska and Zinna (2014) find that such interventions reduced real long-term government bond yields between 2001 and 2008 also by 80 basis points. Bouis et al (2014) highlight the impact of foreign reserve accumulation by central banks in emerging market economies (EMEs), which have grown rapidly since the mid-1990s and a large part of these reserves were invested in US assets, in particular US Treasury securities, given the international status of the US dollar, and the safety and liquidity of these assets.…”

“…They show that within a span of few days around the announcement of QE nominal government bond yields declined by 8 basis points on average for each 1% of GDP of asset purchase (Bouis et al, 2013). In the United States, Kaminska and Zinna (2014) find that QE measures in 2009-2012 reduced 10-year real US government bond yields by around 140 basis points (i.e. 13 basis points for purchases of 1% of 2009 GDP).…”