Official demand for US debt: implications for US real rates

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 03 May 2019

Staff Working Paper No. 796

By Iryna Kaminska and Gabriele Zinna

We estimate a structural term-structure model of US 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. While 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 QE period. Overall, the two-factor model, augmented to account for changing liquidity conditions, offers a good representation of real rates during the 2001–2016 period; however, we flag some caveats and possible extensions.

PDFOfficial demand for US debt: implications for US real rates

PDFOfficial demand for US debt: implications for US real rates - Appendix

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