Preferred habitats and timing in the world’s safe asset

We build a comprehensive security-level dataset on the size, flows, coupon payments, and returns of foreign and U.S. investors’ Treasury portfolios. The dataset shows that the composition of investors’ Treasury portfolios differs: Private U.S. and private foreign investors hold longer-duration, higher-return Treasuries, whereas foreign governments hold shorter-duration, lower-return Treasuries. Thus, all else equal, private investors should earn higher returns than foreign governments. But all else is not equal. Foreign governments, even with their low-return, low-volatility portfolios, earned higher ex post returns because U.S. and foreign private investors’ returns are substantially reduced by poor timing. This direct comparison of the portfolios of all investors in the Treasury market shows clear similarities between U.S. and foreign private investors and the difference between these private investors and foreign governments. If a distinction is to be made about investors in the Treasury market, it should be between private and government, not foreign and domestic.