Foreign Holdings of U.S. Treasuries and U.S. Treasury Yields

38 Pages Posted: 2 Mar 2012 Last revised: 24 Feb 2013

See all articles by Daniel O. Beltran

Daniel O. Beltran

Federal Reserve Board

Maxwell Kretchmer

Harvard University - Harvard Kennedy School (HKS)

Jaime Marquez

Board of Governors of the Federal Reserve System - International Financial Transactions Section

Charles P. Thomas

Thomas & Son Analytics

Date Written: January 28, 2012

Abstract

Foreign official holdings of U.S. Treasuries increased from $400 billion in January 1994 to about $3 trillion in June 2010. Most of this growth is accounted for by a handful of emerging market economies that have been running large current account surpluses. These countries are channeling their savings through the official sector, which is then acquiring foreign exchange reserves. Any shift in policy to reduce their current account surpluses or dampen the rate of reserves accumulation would likely slow the pace of foreign official purchases of U.S. Treasuries. Would such a slowing of foreign official purchases of Treasury notes and bonds affect long-term Treasury yields? Most likely yes, and the effects appear to be large. By our estimates, if foreign official inflows into U.S. Treasuries were to decrease in a given month by $100 billion, 5-year Treasury rates would rise by about 40-60 basis points in the short run. But once we allow foreign private investors to react to the yield change induced by the shock to foreign official inflows, the long-run effect is about 20 basis points.

Keywords: Foreign official inflows, Treasury yields, reserves, capital flows

JEL Classification: F31, F32, F34

Suggested Citation

Beltran, Daniel O. and Kretchmer, Maxwell and Marquez, Jaime and Thomas, Charles P., Foreign Holdings of U.S. Treasuries and U.S. Treasury Yields (January 28, 2012). Journal of International Money and Finance, Vol. 32, No. 1, 2013; FRB International Finance Discussion Paper No. 1041. Available at SSRN: https://ssrn.com/abstract=2014172 or http://dx.doi.org/10.2139/ssrn.2014172

Daniel O. Beltran (Contact Author)

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Maxwell Kretchmer

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Jaime Marquez

Board of Governors of the Federal Reserve System - International Financial Transactions Section ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Charles P. Thomas

Thomas & Son Analytics ( email )

5409 Center St
Chevy Chase, MD 20815
United States
2022075834 (Phone)

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