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Preferred-habitat investors and the US term structure of real rates


  • Kaminska, Iryna

    () (Bank of England)

  • Vayanos, Dimitri

    (LSE, CEPR and NBER)

  • Zinna, Gabriele

    () (Bank of England)


We estimate structurally a model of the term structure of interest rates that is consistent with no arbitrage but allows for demand pressures. The term structure in our model is determined through the interaction of risk-averse arbitrageurs and preferred-habitat investors with preferences for specific maturities. The model is estimated on US real rates during the 2000s and allows for two factors: one corresponding to the short rate and one to preferred-habitat demand. We find that the puzzling drop in long rates during 2004-05 (Greenspan conundrum) is driven by the demand factor. International reserves, foreign official holdings of longer-term US Treasuries may all be proxies for the preferred-habitat demand factor. For example, foreign purchases in the year to July 2004 appear to have lowered the ten-year rate by about 100 basis points. Foreign purchases have larger effects following periods when arbitrageurs have lost money.

Suggested Citation

  • Kaminska, Iryna & Vayanos, Dimitri & Zinna, Gabriele, 2011. "Preferred-habitat investors and the US term structure of real rates," Bank of England working papers 435, Bank of England.
  • Handle: RePEc:boe:boeewp:0435

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    References listed on IDEAS

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    Cited by:

    1. Laura Jaramillo & Yuanyan S Zhang, 2013. "Real Money Investors and Sovereign Bond Yields," IMF Working Papers 13/254, International Monetary Fund.
    2. Michael E. Cahill & Stefania D’Amico & Canlin Li & John S. Sears, 2013. "Duration risk versus local supply channel in Treasury yields: evidence from the Federal Reserve's asset purchase announcements," Finance and Economics Discussion Series 2013-35, Board of Governors of the Federal Reserve System (U.S.).
    3. Blattner, Tobias & Joyce, Michael A. S., 2016. "Net debt supply shocks in the euro area and the implications for QE," Working Paper Series 1957, European Central Bank.
    4. D’Amico, Stefania & King, Thomas B., 2013. "Flow and stock effects of large-scale treasury purchases: Evidence on the importance of local supply," Journal of Financial Economics, Elsevier, vol. 108(2), pages 425-448.
    5. Bush, Oliver & Farrant, Katie & Wright, Michelle, 2011. "Financial Stability Paper No 13: Reform of the International Monetary and Financial System," Bank of England Financial Stability Papers 13, Bank of England.
    6. Stefania D'Amico & Thomas B. King, 2012. "Flow and stock effects of large-scale asset purchases: evidence on the importance of local supply," Finance and Economics Discussion Series 2012-44, Board of Governors of the Federal Reserve System (U.S.).
    7. Serkan Arslanalp & Tigran Poghosyan, 2016. "Foreign Investor Flows and Sovereign Bond Yields in Advanced Economies," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(6), pages 45-67, June.
    8. repec:bla:jecrev:v:68:y:2017:i:4:p:443-457 is not listed on IDEAS
    9. repec:wsi:qjfxxx:v:04:y:2014:i:01:n:s2010139214500013 is not listed on IDEAS
    10. Junko Koeda, 2017. "Bond Supply and Excess Bond Returns in Zero-Lower Bound and Normal Environments: Evidence from Japan," The Japanese Economic Review, Japanese Economic Association, vol. 68(4), pages 443-457, December.

    More about this item


    Foreign reserves; term structure of interest rates; term premium; MCMC;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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