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Global Capital Flows, Foreign Financing and US Interest Rates

  • Author(s): Bardhan, Ashok Deo
  • Jaffee, Dwight M.
  • et al.
Abstract

Almost 45 percent of all US Treasury securities and just under 20 percent of US Agency securities (bonds and MBS) are currently held by foreign investors. This paper addresses key questions concerning these large foreign investments in Treasuries and Agencies: Are these investments sustainable? What is the likely impact on US Treasury and mortgage interest rates if foreign investors begin to redeploy their investment resources? What could be the triggering or tipping points in China’s diversification strategy? We trace the increase in foreign holdings of US securities, analyze the different scenarios that could unfold and their potential impact on interest rates, evaluate the likelihood and timing of the changes in demand, and speculate on the political economy of China’s motivations and purchasing behavior.

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