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


  • David Kohn


This paper investigates the effect of purchases of U.S. Treasury bonds by foreigners on long-term yields and the term-premium. 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 the period prior to the financial crisis. Half of this change is explained by a drop in the term-premium: in the model, foreign purchases increase domestic agents' consumption above their habit, thus reducing their risk-aversion and decreasing the term-premium. Finally, I investigate the potential impact of a sell-off of U.S. Treasuries by foreigners. I show that such a reversal of foreign inflows would result in a sharp increase in the term-premium and, thus, in long-term yields.

Suggested Citation

  • David Kohn, 2017. "Addicted to Debt: Foreign Purchases of U.S. Treasuries and the Term Premium," Documentos de Trabajo 480, Instituto de Economia. Pontificia Universidad Católica de Chile..
  • Handle: RePEc:ioe:doctra:480

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    Cited by:

    1. repec:wsi:qjfxxx:v:04:y:2014:i:01:n:s2010139214500013 is not listed on IDEAS
    2. 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.
    3. John Nana Francois, 2016. "Foreign Official Holdings of U.S Treasuries, Stock Effect and the Economy: A DSGE Approach," 2016 Papers pfr351, Job Market Papers.

    More about this item

    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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