The Replacement of Safe Assets: Evidence from the U.S. Bond Portfolio

54 Pages Posted: 25 Feb 2015

See all articles by Carol C. Bertaut

Carol C. Bertaut

Board of Governors of the Federal Reserve System

Alexandra Tabova

Board of Governors of the Federal Reserve System

Vivian Wong

Board of Governors of the Federal Reserve System

Date Written: October 24, 2014

Abstract

The expansion in financial sector "safe" assets, largely in the form of structured products from the U.S. and the Caribbean, in the lead-up to the global financial crisis has by now been fairly well documented. Using a unique dataset derived from security-level data on U.S. portfolio holdings of foreign securities, we show that since the crisis, it is mostly the foreign financial sector that appears to have met U.S. demand for safe and liquid investment assets by expanding its supply of debt securities. We also find a strong negative correlation between the foreign share of the U.S. financial bond portfolio and measures of U.S. safe assets availability: providing evidence on the importance of foreign-issued financial sector debt as a substitute when U.S. issued "safe" assets are scarce. Furthermore, although U.S. investors continue to tap foreign financial markets for "safe" assets, we show that the type of foreign financial debt that fills this portfolio niche post-crisis is quite different than pre-crisis. Post-crisis, we find that U.S. investors have replaced offshore-issued structured securities with high-grade U.S. dollar-denominated financial debt issued from a small group of OECD countries (most notably Australia and Canada). Lastly, these developments have led to a decline in home bias in the U.S. financial bond portfolio that we are able to document for the first time.

Keywords: safe assets, international portfolio choice, financial sector debt, home

JEL Classification: F21, F34, G11, G20

Suggested Citation

Bertaut, Carol C. and Tabova, Alexandra and Wong, Vivian, The Replacement of Safe Assets: Evidence from the U.S. Bond Portfolio (October 24, 2014). FRB International Finance Discussion Paper No. 1123. Available at SSRN: https://ssrn.com/abstract=2569200 or http://dx.doi.org/10.2139/ssrn.2569200

Carol C. Bertaut (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

Alexandra Tabova

Board of Governors of the Federal Reserve System ( email )

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

Vivian Wong

Board of Governors of the Federal Reserve System ( email )

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

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