Actually, the title really should be official purchases, data revisions and the bond yield conundrum. This is a rather wonky post.
The Economist View highlighted a paper by Tao Wu of the Federal Reserve Bank of Dallas (and a coauthor of Rudebusch, Swanson and Wu) that cast doubt on the impact of foreign official demand on Treasury yields.
Tao Wu’s Chart 3 in particular caught my eye. According to the data presented, official purchases (or Treasuries) fell sharply after 2004, but bond yields remained low. The conundrum out-lasted official demand.
That — together with some econometric work that failed to find the expected relationship between official demand and treasury yields (or rather only found the expected relationship after 2000) — casts a bit of doubt on my preferred explanation for low US rates over the past several years. It also is a conclusion at odds with Warnock and Warnock.
Perhaps as importantly, the sharp fall in official demand for Treasuries in graph 3 didn’t match my sense of what has been happening. That called for a bit more investigation. I also wanted to look at whether one key difference between Rudebusch and Wu and Warnock and Warnock (updated here)– namely that Warnock and Warnock look at official demand for Treasuries and Agencies not just official demand for Treasuries might explain the different conclusions. Some Agencies are fairly close substitutes for Treasuries.
My conclusions? To make a long story short, data revisions matter. The fall in official demand for Treasuries so apparent in Wu’s chart largely disappears if you look at the revised data (which is only available on a quarterly basis). Essentially, the shift in reserve growth from Japan, Korea and Taiwan to China, Brazil, India and the oil exporters reduced the share of official demand for Treasuries that appears in the monthly TIC data more than in reduced official demand for Treasuries.