Here are the costs for foreigners fleeing to the safety of US Treasury bonds

Safety comes at a price, and that applies to investors fleeing to the safest asset in the global financial system, US Treasuries.

Researchers have looked at the returns of investors in US Treasury bonds since 1980. They found that foreign investors returned about 3% less per year than a buy-and-hold strategy over the same period.

“In other words, foreign investors buy US Treasuries when they are expensive and offer low future yields, and exit their positions when Treasuries are cheap and offer high future yields,” the study by Zhengyang Jiang, a Assistant Professor of Finance at the Northwestern Kellogg School of Management; and Arvind Krishnamurthy and Hanno Lustig, both Professors of Finance at the Stanford Graduate School of Business.

Foreigners are doing just as badly as another price-inelastic buyer, the US Federal Reserve. And foreign private investors are doing even worse than foreign central banks. The big winner of this behavior is the US government, which enjoys lower financing costs than it otherwise would have.

However, the researchers note that this willingness to buy US Treasury bonds wanes when they are expensive. In the last 10 years, they haven’t left the buy-and-hold strategy behind. “In terms of volumes, foreign investors have been net sellers of US Treasuries and bonds during the recent Covid-19 crisis, while they have been net buyers in previous global recessions. It’s possible we’re seeing a tipping point in foreign demand for US Treasuries, as some have argued,” they say.

The yield of the 10-year Treasury TMUBMUSD10Y,
has increased by 1.25 percentage points to 2.75% this year. Yields move in the opposite direction to prices.

The unpeered working paper was circulated by the National Bureau of Economic Research. Here are the costs for foreigners fleeing to the safety of US Treasury bonds

Brian Lowry

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