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International Capital Flows and U.S. Interest Rates

Francis E. Warnock and Veronica C. Warnock

Foreign flows have an economically large and statistically significant impact on long-term interest rates. Controlling for various macroeconomic factors we estimate that had there been no foreign flows into U.S. bonds over the past year, the 10-year Treasury yield would currently be 150 basis points higher; even a step-down to average inflows would imply an increase of 105 basis points. The impact of the headline-making foreign official flows—a relatively small subset of total foreign accumulation of U.S. bonds—is also significant but markedly smaller. Our results are robust to a number of alternative specifications.

Keywords: bond yields, Japan, China
JEL Codes: E43, E44, F21

Last updated 28 August 2014 by IIIS (Email).