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

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  • David Kohn

Abstract

In this paper, I study the quantitative effect of purchases of U.S. Treasury bonds and notes by foreigners on long-term yields and the term-premium over the recent decade. 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 this period. A third of this change is explained by a drop in the term-premium: in the model, foreign purchases increase consumption with respect to a reference level or habit, which reduces the agent's risk-aversion, therefore decreasing the term-premium. Finally, I show that a reversal of foreign inflows results in a sharp increase in long-term yields.

Suggested Citation

  • David Kohn, 2015. "Addicted to Debt: Foreign Purchases of U.S. Treasuries and the Term-Premium," Department of Economics Working Papers 2015_1, Universidad Torcuato Di Tella.
    • Handle: RePEc:udt:wpecon:2015_1
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    Cited by:

    1. Zhengyang Jiang & Hanno Lustig & Stijn Van Nieuwerburgh & Mindy Z. Xiaolan, 2019. "The U.S. Public Debt Valuation Puzzle," NBER Working Papers 26583, National Bureau of Economic Research, Inc.
    2. Fernando Broner & Alberto Martin & Lorenzo Pandolfi & Tomas Williams, 2019. "Winners and losers from Sovereign debt inflows: evidence from the stock market," Economics Working Papers 1693, Department of Economics and Business, Universitat Pompeu Fabra.
    3. Jesus Sierra, 2014. "International Capital Flows and Bond Risk Premia," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 4(01), pages 1-36.
    4. Francois John Nana, 2020. "Foreign official holdings of US treasuries, stock effect and the economy: a DSGE approach," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(1), pages 1-28, January.
    5. Rodrigo Alfaro & Mauricio Calani, 2018. "Pension Funds and the Yield Curve: The Role of Preference for Maturity," Working Papers Central Bank of Chile 821, Central Bank of Chile.
    6. Broner, Fernando & Martin, Alberto & Pandolfi, Lorenzo & Williams, Tomas, 2021. "Winners and losers from sovereign debt inflows," Journal of International Economics, Elsevier, vol. 130(C).
    7. Zhengyang Jiang & Hanno Lustig & Mindy Xiaolan & Stijn Van Nieuwerburgh, 2019. "Government Risk Premium Puzzle," 2019 Meeting Papers 437, Society for Economic Dynamics.

    More about this item

    Keywords

    term-premium; long-term yields; U.S. Treasury bonds; foreign official institutions; habits;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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