Searching for Yield Abroad: Risk-Taking through Foreign Investment in U.S. Bonds
Alexandra Tabova and
Stijn Claessens ()
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John Ammer: Federal Reserve Board
Alexandra Tabova: Federal Reserve Board
No 960, 2018 Meeting Papers from Society for Economic Dynamics
The risk-taking effects of low interest rates, now prevailing in many advanced countries, (“search-for-yield”) are hard to analyze due to both a paucity of data and challenges in identification. Unique, security-level data on portfolio investment into the United States allow us to overcome both problems. Analyzing holdings of investors from 36 countries in close to 15,000 unique U.S. corporate bonds between 2003 and 2016, we show that declining home-country interest rates lead investors to shift their international bond portfolios toward riskier U.S. corporate bonds, consistent with “search-for-yield”. We estimate even stronger effects when home interest rates reach a low level, suggesting that risk-taking in securities accelerates as rates decline.
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