Home Country Interest Rates and International Investment in U.S. Bonds

35 Pages Posted: 28 Jun 2018 Last revised: 21 Feb 2019

See all articles by John Ammer

John Ammer

Board of Governors of the Federal Reserve System

Stijn Claessens

Bank for International Settlements (BIS)

Alexandra Tabova

Board of Governors of the Federal Reserve System

Caleb Wroblewski

University of Chicago - Booth School of Business

Date Written: 2018-06-22

Abstract

We analyze how interest rates affect cross-border portfolio investments. Data on U.S. bond holdings by foreign investors from 31 countries for the period 2003 - 2016 and a large variety in movements in interest rates in these countries provide for a unique way to analyze shifts in investment behavior in response to interest rates. We find that low(er) interest rates, now prevailing in many advanced countries, lead to greater investment in general into the United States, with the effects generally driven by investment in (higher yielding) corporate bonds, rather than in Treasury bonds. In addition to affecting overall investments, lower interest rates at home are associated with a greater weight on corporate bonds, consistent with search- for-yield. The results are economically important and robust to controlling for a number of country-specific macroeconomic and financial conditions as well as to sample restrictions and choices of interest rate. Our findings have important policy implications in that they suggest that low interest rates can lead to shifts in the volume and composition of overseas investments.

Keywords: Low interest rates, Search-for-yield, Portfolio choice, Safe and risky assets, U.S. bonds

JEL Classification: F21, F34, G11, G20

Suggested Citation

Ammer, John and Claessens, Stijn and Tabova, Alexandra and Wroblewski, Caleb, Home Country Interest Rates and International Investment in U.S. Bonds (2018-06-22). FRB International Finance Discussion Paper No. 1231. Available at SSRN: https://ssrn.com/abstract=3201754 or http://dx.doi.org/10.17016/IFDP.2018.1231

John Ammer (Contact Author)

Board of Governors of the Federal Reserve System

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

Stijn Claessens

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Alexandra Tabova

Board of Governors of the Federal Reserve System ( email )

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

Caleb Wroblewski

University of Chicago - Booth School of Business

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
31
Abstract Views
246
PlumX Metrics