Title: Impact of foreign official purchases of U.S. treasuries on the yield curve
Authors: Erin Wolcott - Middlebury College (United States) [presenting]
Abstract: Foreign governments went from owning ten percent of publicly-held U.S. Treasury debt in 1985 to owning the majority in 2008. Since the financial crisis, foreign governments have reduced their Treasury positions. The foreign official purchases are revealed to have depressed short- and medium-term interest rates in the U.S., despite conventional wisdom pointing towards the long end of the yield curve. We estimate a Gaussian affine term structure model, augmented with a vector autoregression of macroeconomic variables, to examine effects over the entire yield curve, as opposed to a single maturity. Distinguishing which part of the yield curve foreign official purchases move is important for monetary policy. If segments of the yield curve are increasingly determined by international financial markets, then it may be more difficult for the Federal Reserve to implement its interest rate policy and mitigate short-term fluctuations.