Official Demand for U.S. Debt: Implications for U.S. Real Rates

Iryna Kaminska and Gabriele Zinna

Journal of Money, Credit and Banking, 2020, vol. 52, issue 2-3, 323-364

Abstract: We estimate a structural term‐structure model of U.S. real rates, where arbitrageurs accommodate demand pressures exerted by domestic and foreign official investors. Official demand affects rates by altering the aggregate price of duration risk, and thereby bond risk premiums. Although foreign central banks' demand contributed to reduce long‐term real rates mainly in the years prior to the global‐financial crisis, the Federal Reserve's demand lowered rates during the quantitative easing period. Overall, the two‐factor model, augmented to account for changing liquidity conditions, offers a good representation of real rates during the 2001–16 period; however, we flag some caveats and possible extensions.

Date: 2020
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https://doi.org/10.1111/jmcb.12660

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Working Paper: Official demand for US debt: implications for US real rates (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:52:y:2020:i:2-3:p:323-364

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