Low Interest Rates and International Investment Position of USA
why long-term U.S. interest rates, as measured by the nominal yields of U.S. Treasury securities, have been persistently low and whether they are likely to remain low this year.
Fundamental economic forces are the key drivers of long-term rates. Long-term rates depend on
- Federal Reserve monetary policy,
- short-term interest rates,
- actual and expected inflation,
- economic growth and prospects,
- and global financial flows.
Hence, a careful economic analysis of the economic fundamentals is essential to understand why nominal Treasury yields have stayed so low for so long.
From U.S. Long-Term Interest Rate Looks To Stay Low For Longer
From Secular drivers of the global real interest rate
Long-term real interest rates across the world have fallen by about 450 basis points over the past 30 years. The co-movement in rates across both advanced and emerging economies suggests a common driver: the global neutral real rate may have fallen. In this paper we attempt to identify which secular trends could have driven such a fall. Although there is huge uncertainty, under plausible assumptions we think we can account for around 400 basis points of the 450 basis points fall. Our quantitative analysis highlights slowing global growth as one force that may have pushed down on real rates recently, but shifts in saving and investment preferences appear more important in explaining the long-term decline. We think the global saving schedule has shifted out in recent decades due to demographic forces, higher inequality and to a lesser extent the glut of precautionary saving by emerging markets. Meanwhile, desired levels of investment have fallen as a result of the falling relative price of capital, lower public investment, and due to an increase in the spread between risk-free and actual interest rates. Moreover, most of these forces look set to persist and some may even build further. This suggests that the global neutral rate may remain low and perhaps settle at (or slightly below) 1% in the medium to long run. If true, this will have widespread implications for policymakers — not least in how to manage the business cycle if monetary policy is frequently constrained by the zero lower bound.
From INTERNATIONAL CAPITAL FLOWS AND U.S. INTEREST RATES Francis E. Warnock
In comparison, we know very little about the role of foreign flows in large developed economies. We aim to fill this gap by examining the impact of international capital flows on what is arguably the most important price in the U.S. economy—and possibly the world—that of the ten-year Treasury bond. Specifically, we ask to what extent foreign flows into U.S. bond markets can explain movements in long-term Treasury yields.
We address this issue at an important time. Two years ago, in the summer of 2003, short-term interest rates were very low and inflation was under control. Most models would have predicted very poor returns for U.S. bonds over the subsequent year or two.1 And, over the course of 2004, as inflation picked up, the Federal Reserve began a tightening cycle that raised short rates, and economic growth strengthened, many market observers predicted an increase in long-term U.S. interest rates that would result in substantial losses on bond positions (see, for example, Roach (2005)). Long-term interest rates have, however, remained quite low, and the bond market has held up at a time when many predicted subpar performance. The stubbornly low long rates have puzzled not only market participants and financial economists, but also policymakers. Might foreign flows help explain this puzzling behavior?
From INTERNATIONAL CAPITAL FLOWS AND U.S. INTEREST RATES Francis E. Warnock
Foreign official purchases of U.S. government bonds have an economically large and statistically significant impact on long-term interest rates. Federal Reserve credibility, as evidenced by dramatic reductions in both long-term inflation expectations and the volatility of long rates, contributed much to the decline of long rates in the 1990s. More recently, however, foreign flows have become important. Controlling for various factors given by a standard macroeconomic model, we estimate that had there been no foreign official flows into U.S. government bonds over the past year, the 10-year Treasury yield would currently be 90 basis points higher. Our results are robust to a number of alternative specifications.
From ABS Inflows to the United States and the Global Financial Crisis
The “global saving glut” (GSG) hypothesis argues that the surge in capital inflows from emerging market economies to the United States led to significant declines in long-term interest rates in the United States and other industrial economies. In turn, these lower interest rates, when combined with both innovations and deficiencies of the U.S. credit market, are believed to have contributed to the U.S. housing bubble and to the buildup in financial vulnerabilities that led to the financial crisis. Because the GSG countries for the most part restricted their U.S. purchases to Treasuries and Agency debt, their provision of savings to ultimately risky subprime mortgage borrowers was necessarily indirect, pushing down yields on safe assets and increasing the appetite for alternative investments on the part of other investors. We present a more complete picture of how capital flows contributed to the crisis, drawing attention to the sizable inflows from European investors into U.S. private-label asset-backed securities (ABS), including mortgage-backed securities and other structured investment products. By adding to domestic demand for private-label ABS, substantial foreign acquisitions of these securities contributed to the decline in their spreads over Treasury yields. Through a combination of empirical estimation and model simulation, we verify that both GSG inflows into Treasuries and Agencies, as well as European acquisitions of ABS, played a role in contributing to downward pressures on U.S. interest rates.
Gross capital flows tell the true story of which countries impact US economy. Some economists blame investments from China as a problem under Global Savings Glut hypothesis. See papers from Ben Bernanke and from R Caballero.
However, there are no studies I found which detail impact of Capital Outflows on US economic growth/ Investments/ and Interest Rates.
Please let me know if you know of any.
What is combined effect of Capital Inflows and Capital Outflows on US economic growth and short term and long term interest rates?
International Investment Position
The International Investment Position (IIP) is a statistical balance sheet that presents the dollar value of U.S. financial assets and liabilities with respect to foreign residents at a specific point in time. BEA presents IIP statistics at the end of a quarter or year (March, June, September, and December). For the June release, BEA also presents statistics on changes in the yearend position that are disaggregated into financial transactions and other changes in position.
The U.S. net international investment position is defined as the value of U.S. assets less the value of U.S. liabilities.
Components of IIP – Assets
- Direct Investments
- Portfolio Investments
- Financial Derivatives
- Other Investments
IIP is a Stock position as compared to Capital Flow which is Flow variable. Changes in capital in flows and outflows during the year impact year end IIP. IIP indicates a cumulative effect (stock) of capital flows in an economy.
U.S. Net International Investment Position
Third Quarter 2016
The U.S. net international investment position increased to -$7,781.1 billion (preliminary) at the end of the third quarter of 2016 from -$8,026.9 billion (revised) at the end of the second quarter, according to statistics released today by the Bureau of Economic Analysis (BEA). The $245.8 billion increase in the net investment position reflected a $346.2 billion increase in U.S. assets and a $100.5 billion increase in U.S. liabilities.
The net investment position increased 3.1 percent in the third quarter, compared with a decrease of 5.9 percent in the second quarter and an average quarterly decrease of 6.0 percent from the first quarter of 2011 through the first quarter of 2016.
U.S. assets increased $346.2 billion to $24,861.2 billion at the end of the third quarter, reflecting an increase in assets excluding financial derivatives that was partly offset by a decrease in financial derivatives.
Assets excluding financial derivatives increased $794.9 billion to $22,086.1 billion, mostly reflecting increases in portfolio investment and direct investment assets due to increases in foreign equity prices.
Financial derivatives decreased $448.7 billion to $2,775.1 billion, mostly in single-currency interest rate contracts and in foreign exchange contracts.
U.S. liabilities increased $100.5 billion to $32,642.3 billion at the end of the third quarter, reflecting an increase in liabilities excluding financial derivatives that was partly offset by a decrease in financial derivatives.
Liabilities excluding financial derivatives increased $546.3 billion to $29,922.5 billion, reflecting increases in portfolio investment and direct investment liabilities due to financial transactions and increases in U.S. equity prices.
Financial derivatives decreased $445.8 billion to $2,719.9 billion, mostly in single-currency interest rate contracts and in foreign exchange contracts.
More details below:
Direct Investment & Multinational Enterprises (MNEs)
- Balance of payments and direct investment position data cover transactions and positions between parent companies and their affiliates.
- Data on activities of multinational enterprises provide a wide variety of indicators of the financial structure and operations of the firms involved.
- U.S. direct investment abroad (outward direct investment) is ownership by a U.S. investor of at least 10 percent of a foreign business.
- Foreign direct investment in the United States (inward direct investment) is ownership by a foreign investor of at least 10 percent of a U.S. business.
Direct Investment Position
Direct investment is a category of cross-border investment associated with a resident in one economy having control or a significant degree of influence on the management of an enterprise resident in another economy. Ownership or control of 10 percent or more of the nonresident entity’s voting securities is the threshold for separating direct investment from other types of investment. Direct investment positions include positions in equity and debt instruments. BEA’s IIP statistics feature the market value measure of direct investment positions, a measure that values owner’s equity at current-period prices using indexes of stock market prices.
Components of Direct Investment
Direct investment position include positions in equity and debt instruments.
Activities of U.S. Multinational Enterprises in the USA and Abroad
Key Sources of Research:
Direct Investment Positions for 2015 Country and Industry Detail
Derrick T. Jenniges and James J. Fetzer
U.S. Net International Investment Position End of the Second Quarter of 2016
Activities of U.S. Multinational Enterprises in the United States and Abroad
Preliminary Results From the 2014 Benchmark Survey
International Capital Flows and U.S. Interest Rates
Francis E. Warnock Veronica Cacdac Warnock
International Capital Flows and U.S. Interest Rates
Capital inflows and euro area long-term interest rates
Daniel Carvalho and Michael Fidora
Gross Capital Flows Dynamics and Crises
Fernando Broner Tatiana Didier Aitor Erce Sergio L. Schmukler
International Gross Capital Flows: New Uses of Balance of Payments Data and Application to Financial Crises
Thorsten Janus, Daniel Riera-Crichton
global imbalances and gross capital flows
P. Butzen M. Deroose S. Ide
Gross or Net International Financial Flows Understanding the Financial Crisis
Karen H. Johnson
International Investment Position: A Guide to Data Sources.
International Monetary Fund. Statistics Department.
Washington, D.C., October 2002.
Explaining the US Bond Yield Conundrum
Harm Bandholz, Jörg Clostermann, Franz Seitz
Interest Rate Conundrum
Roger Craine Vance L. Martin
International Capital Flows and the Returns to Safe Assets in the United States, 2003-2007
Ben S. Bernanke, Carol Bertaut, Laurie Pounder DeMarco, and Steven Kamin
An Equilibrium Model of “Global Imbalances” and Low Interest Rates
Ricardo J. Caballero Emmanuel Farhi Pierre-Olivier Gourinchas∗
This Draft: July 04, 2007
Real Interest Rates Over the Long Run
Decline and convergence since the 1980s
ABS Inflows to the United States and the Global Financial Crisis
Carol Bertaut Laurie Pounder DeMarco Steve Kamin Ralph Tryon
The Financial Crisis and U.S. Cross-Border Financial Flows
Carol C. Bertaut and Laurie Pounder,
EURO AREA CROSS-BORDER FINANCIAL FLOWS AND THE GLOBAL FINANCIAL CRISIS
Katrin Forster, Melina Vasardani and Michele Ca’ Zorzi
The Effects of the Saving and Banking Glut on the U.S. Economy
Alejandro Justiniano Giorgio E. Primiceri Andrea Tambalotti
FACTORS BEHIND LOW LONG-TERM INTEREST RATES
By Rudiger Ahrend, Pietro Catte and Robert Price
Secular drivers of the global real interest rate
Lukasz Rachel(1) and Thomas D Smith
Low real interest rates: Causes and outlook
Michael Heise, Jennifer Langenegger, Rolf Schneider
Low long-term interest rates as a global phenomenon
by Peter Hördahl, Jhuvesh Sobrun and Philip Turner
U.S. Long-Term Interest Rate Looks To Stay Low For Longer
Beth Ann Bovino,