Preferred Habitats and Timing in the World’s Safe Asset

We build the first-ever comprehensive security-level dataset on the size, flows, coupon payments and returns of foreign and U.S. investors’ Treasury portfolios. Portfolio composition is such that private investors, whether U.S. or foreign, should all else equal earn higher returns than foreign governments; private investors hold longer-duration higher-return Treasuries, whereas foreign governments hold shorter-duration lower-return Treasuries. But all else is not equal. Foreign governments earn higher returns because U.S. and foreign private investors’ poor timing substantially reduces their returns. Moreover, we find that foreigners beat the (non-Fed) market or, to put it another way, that there is no convenience yield attributable to foreigners paying (through poor returns) for non-pecuniary benefits. U.S. investors earn a small and insignificant 19 basis points less than market returns. One simple but far-reaching implication: When assessing U.S. Treasuries it might be useful to differentiate by the investor’s type (private or government) but not by country (U.S. or foreign).