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Preferred-Habitat Investors and the US Term Structure of Real Rates

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  • Iryna Kaminska
  • Dimitri Vayanos
  • Gabriele Zinna

Abstract

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, which in turn is correlated with purchases of long-term bonds by foreign officials. For example, foreign purchases in July 2004 appear to have lowered the 10-year rate by about 100 basis points. Foreign purchases have larger effects following periods when arbitrageurs have lost money.

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  • Iryna Kaminska & Dimitri Vayanos & Gabriele Zinna, 2011. "Preferred-Habitat Investors and the US Term Structure of Real Rates," FMG Discussion Papers dp674, Financial Markets Group.
  • Handle: RePEc:fmg:fmgdps:dp674
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    Cited by:

    1. 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.).
    2. 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.
    3. Scott Mixon & Esen Onur, 2019. "Derivatives pricing when supply and demand matter: Evidence from the term structure of VIX futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(9), pages 1035-1055, September.
    4. Mansur, Alfan & Al Arif, Munafsin, 2017. "Dampak Kepemilikan Asing terhadap Pasar Surat Berharga Negara (SBN) Indonesia [The Impact of Foreign Ownership on the Indonesian Government Bonds Market]," MPRA Paper 93944, University Library of Munich, Germany, revised 14 Jun 2017.
    5. 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.
    6. Pierre Bui Quang, 2018. "The effect of non-resident investments on the French sovereign spread," EconomiX Working Papers 2018-52, University of Paris Nanterre, EconomiX.
    7. Blattner, Tobias Sebastian & 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.
    8. Iryna Kaminska & Gabriele Zinna, 2020. "Official Demand for U.S. Debt: Implications for U.S. Real Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(2-3), pages 323-364, March.
    9. 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.
    10. Gabriele Zinna, 2016. "Price Pressures on UK Real Rates: An Empirical Investigation," Review of Finance, European Finance Association, vol. 20(4), pages 1587-1630.
    11. Laura Jaramillo & Ms. Yuanyan S Zhang, 2013. "Real Money Investors and Sovereign Bond Yields," IMF Working Papers 2013/254, International Monetary Fund.
    12. 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.
    13. 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.
    14. Scott Mixon & Tugkan Tuzun, 2018. "Price Pressure and Price Discovery in the Term Structure of Interest Rates," Finance and Economics Discussion Series 2018-065, Board of Governors of the Federal Reserve System (U.S.).
    15. 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.).

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    JEL classification:

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

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