Francis Warnock (University of Virginia) - Preferred Habitats and Timing in the World’s Safe Asset
Co-author: Alexandra Tabova (Federal Reserve System)
Investors’ behavior in U.S. Treasuries - the world’s safe asset - affects monetary policy transmission mechanisms, fiscal policy space, loan pricing, and international vulnerabilities. Yet it is not well understood for a simple reason: researchers, not having a clear picture of the Treasury portfolios of the largest participants in the market (foreigners and U.S. private investors), often infer behavior from aggregate statistics that can be less than pristine. We address this by building, from confidential security-level surveys, a comprehensive dataset on the size, flows, coupon payments, and returns of foreign and U.S. investors’ Treasury portfolios. We find that investors do not view Treasuries as homogenous but have preferred habitats that determine returns: U.S. private investors hold a long-duration Treasury portfolio that delivers high average annual returns with high volatility, while foreigners have shorter-duration lower-volatility portfolios. Further, when taking into account the timing and magnitude of purchases, the actual returns earned by foreigners are higher. We also find that while foreign governments have inelastic demand, private U.S. and foreign investors, behind the bulk of Treasury purchases over the past decade, have elastic demand, increasing purchases of Treasuries and the duration of their Treasury portfolios when non-U.S. sovereign yields are low or decrease relative to Treasury yields. Our results shed light on the question of who will buy Treasuries as the Fed reduces the size of its portfolio and suggest that it will more likely be private investors, whether U.S. or foreign, not foreign governments. Finally, our comprehensive security-level data also enable a critical assessment of publicly available data on foreigners’ flows.
Online Research seminars organized by the Bank of Finland's Research Unit are open to all researchers interested in the subjects covered. Those wishing to attend a seminar are kindly asked to register in advance, by filling in the Online Registration Form
The registration for each seminar is open until 9:00 am the day of the seminar. You will receive a link to join the seminar by email at the latest one hour before the seminar is scheduled to begin.