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Re: How Dangerous Is U.S. Government Debt?
This article appears to be written in early 2010. It would be interesting to see the author revise this for 2012. It is interesting that the author also predicts a non linear 100 bp bump to the long bond. oaoHowever, a 2005 Federal Reserve discussion paper pointed to a better answer than the one that was generally accepted at the time of Shelby's question.7The paper began by showing how reported capital flows data could be adjusted for use in empirical analysis. Briefly, because of a bias in the Treasury International Capital data collected by the U.S. government, flows from foreign official institutions were often reported as being from private investors. Infrequent but high-quality snapshots of stocks (as opposed to flows) do not suffer from this bias (although they are subject to a less severe bias, described in the box) and so can be used to correct flows data. Armed with such data, the authors found that foreign official purchases of treasuries had little if any impact on shorter-term U.S. rates (which are well anchored by the Fed Funds rate) but a substantial impact on U.S. long-term interest rates. The accumulation of U.S. treasuries (and near substitutes) by foreign official institutions, then running at about $400 billion per year, lowered long-term U.S. interest rates by anywhere from fifty to one hundred basis points; if foreign governments ceased adding treasuries to their portfolios, U.S. long-term rates could spike upward by the same amount. The increase would be much greater if foreign governments actively sold existing Treasury positions. Equally, a cessation of purchases or a sell-off by foreign private investors could add even more to the upward pressure on U.S. interest rates, since foreign private investors remain large buyers.
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