Addicted to Debt: Foreign Purchases of U.S. Treasuries and the Term-Premium

41 Pages Posted: 17 Feb 2016

See all articles by David Kohn

David Kohn

Pontificia Universidad Catolica de Chile

Date Written: Jan 31, 2016

Abstract

This paper investigates the effect of purchases of U.S. Treasury bonds by foreigners on long-term yields and the term-premium. I set up a consumption-based model with habit preferences, calibrate it to match the average slope of the yield curve in the U.S., and find that foreign purchases decreased long-term yields significantly over the period prior to the financial crisis. Half of this change is explained by a drop in the term-premium: in the model, foreign purchases increase domestic agents' consumption above their habit, thus reducing their risk-aversion and decreasing the term-premium. Finally, I investigate the potential impact of a sell-off of U.S. Treasuries by foreigners. I show that such a reversal of foreign inflows would result in a sharp increase in the term-premium and, thus, in long-term yields.

Keywords: term-premium, long-term yields, U.S. Treasury bonds, habits

JEL Classification: E43, E44, G12, G15

Suggested Citation

Kohn, David, Addicted to Debt: Foreign Purchases of U.S. Treasuries and the Term-Premium (Jan 31, 2016). Available at SSRN: https://ssrn.com/abstract=2630695 or http://dx.doi.org/10.2139/ssrn.2630695

David Kohn (Contact Author)

Pontificia Universidad Catolica de Chile ( email )

Av. Vicuña Mackenna 4860
Macul
Santiago
Chile

HOME PAGE: http://economia.uc.cl/profesor/david-kohn/

Register to save articles to
your library

Register

Paper statistics

Downloads
52
Abstract Views
367
rank
381,693
PlumX Metrics