Home country interest rates and international investment in U.S. bonds

This paper asks where money goes when interest rates at home fall, and answers it with an unusually direct measurement: the holdings of U.S. bonds by private investors in 31 countries, taken from the confidential security-level data underlying the annual U.S. Treasury International Capital (TIC) surveys, for 2003 through 2016. Because the TIC data separate private from official holdings, the authors can strip out central bank reserve managers, whose reasons for owning U.S. securities differ; and because they use face rather than market value, year-to-year changes reflect new investment rather than price moves. The home-country variable is each investor country’s own local-currency sovereign yield – 5-year in the baseline, 1-year in robustness checks – and the panel regressions carry both country and time fixed effects, so the estimates come from within-country movements in home yields relative to a common U.S. and global backdrop. The finding is twofold. First, lower home rates go with more total investment in the United States relative to home GDP, and the effect runs through corporate bonds rather than Treasuries: a home rate 100 basis points lower is associated with U.S. corporate bond holdings higher by 3.6 to 5.3 percent of GDP, against roughly 0.2 percent of GDP for Treasuries and only in the post-crisis years. Second, and more tellingly, lower home rates raise the corporate share within a country’s U.S. bond portfolio by an estimated 2.3 to 2.7 percentage points per 100 basis points – a composition shift toward credit risk that the authors read as search-for-yield, and that is muted or absent during the 2008-2012 crisis window when investors instead tilted toward Treasuries in a pattern they label flight-home. A third result sharpens the interpretation: when the home yield is converted into a synthetic dollar yield by netting out the 12-month forward premium, that hedged rate is statistically insignificant while the unhedged local-currency rate keeps its effect – so “investors do not appear to take hedging costs into account. Rather, they appear to compare nominal promised rates of return among investment choices.” The scope conditions are explicit and limiting. These are panel associations with fixed effects, not an identified causal experiment; the authors argue reverse causality is implausible in direction and magnitude rather than ruling it out by design. And because only the U.S. slice of each country’s portfolio is observed, the paper says plainly that it cannot tell whether these investors’ overall portfolios became riskier: “It could be that these investors invest more aggressively abroad and more conservatively at home, and as such their overall portfolio need not be more risky.”

Alexandra Tabova | Macro Paper Warehouse

Home country interest rates and international investment in U.S. bonds