Foreign Official Demand for U.S. Debt and U.S. Interest Rates: Accounting for Global Common Factors

66 Pages Posted: 18 Aug 2021 Last revised: 19 Oct 2021

See all articles by Rashad Ahmed

Rashad Ahmed

U.S. Department of the Treasury - Office of the Comptroller of the Currency

Date Written: August 13, 2021

Abstract

Previous estimates of the impact of foreign official demand for U.S. Treasuries (USTs) on U.S. Treasury yields control for domestic conditions only. Yet global cyclical factors jointly shape U.S. yields and foreign demand for USTs. This paper recovers global factors from the cross-section of advanced economy sovereign bond yields, and shows that the impact of foreign official UST demand on U.S. 10-year yields is understated -- often by 50% -- when global factors are omitted. This understatement arises from the cyclical nature of UST accumulation by foreign officials, who buy (sell) USTs when safe asset yields are rising (falling) globally. Structural VAR evidence suggests that U.S. yields are particularly sensitive to official demand linked to China.

Keywords: Capital flows; Global savings glut; International reserves; Renminbi; Yuan; Neutral rates

JEL Classification: E43, E44, F21, F30, G10

Suggested Citation

Ahmed, Rashad, Foreign Official Demand for U.S. Debt and U.S. Interest Rates: Accounting for Global Common Factors (August 13, 2021). Available at SSRN: https://ssrn.com/abstract=3906199 or http://dx.doi.org/10.2139/ssrn.3906199

Rashad Ahmed (Contact Author)

U.S. Department of the Treasury - Office of the Comptroller of the Currency ( email )

1500 Pennsylvania Avenue
Washington, DC 20220
United States

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