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

David Kohn

Department of Economics Working Papers from Universidad Torcuato Di Tella

Abstract: In this paper, I study the quantitative effect of purchases of U.S. Treasury bonds and notes by foreigners on long-term yields and the term-premium over the recent decade. 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 this period. A third of this change is explained by a drop in the term-premium: in the model, foreign purchases increase consumption with respect to a reference level or habit, which reduces the agent's risk-aversion, therefore decreasing the term-premium. Finally, I show that a reversal of foreign inflows results in a sharp increase in long-term yields.

Keywords: term-premium; long-term yields; U.S. Treasury bonds; foreign official institutions; habits (search for similar items in EconPapers)
JEL-codes: E43 E44 G12 G15 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2015-02
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (9)

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https://www.utdt.edu/download.php?fname=_143413945424556100.pdf (application/pdf)

Related works:
Working Paper: Addicted to Debt: Foreign Purchases of U.S. Treasuries and the Term Premium (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:udt:wpecon:2015_1

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