Preferred Habitats and Timing in the World’s Safe Asset

We build the first-ever comprehensive security-level dataset on the size, flows, coupon payments and returns of foreign and U.S. investors’ Treasury portfolios. Private U.S. and private foreign investors hold longer-duration higher-return Treasuries, whereas foreign governments hold shorter-duration lower-return Treasuries, so all else equal private investors should earn higher returns than foreign governments. But all else is not equal. Foreign governments, even with their low-returns low-volatility portfolios, actually earn higher returns because U.S. and foreign private investors’ returns are substantially reduced by poor timing. Moreover, we find that foreigners beat the (non- Fed) market, while U.S. investors earn a small and insignificant 19 basis points less than market returns. From our analysis, no investor-type earns significantly less than the (non-Fed) Treasury market, indicating that differential investors are not the source of the convenience yield. In terms of investor behavior more broadly, our novel dataset allows a direct comparison of the different investors in the Treasury market. Foreign private investors are similar to U.S. private investors and both behave differently and have different preferred habitats than governments.