International Capital Flows and U.S. Interest Rates

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Abstract
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.

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