Working Paper: NBER ID: w22017
Authors: Zhiguo He; Arvind Krishnamurthy; Konstantin Milbradt
Abstract: US government bonds are widely considered to be the world’s safe store of value. US government bonds are a large fraction of safe asset portfolios, such as the porfolios of many central banks. The world demand for safe assets leads to low yields on US Treasury bonds. During periods of economic turmoil, such as the events of 2008, these yields fall even further. Moreover, despite the fact that US government debt has risen substantially relative to US GDP over the last decade, US government bond yields have not risen. What makes US government bonds “safe assets”? Our answer in short is that safe asset investors have nowhere else to go but invest in US government bonds.
Keywords: US government bonds; safe assets; financial stability; investor behavior
JEL Codes: E0; F0; G0; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic turmoil (E32) | yields on US Treasury bonds (E43) |
| demand for safe assets (E41) | yields on US Treasury bonds (E43) |
| size of US government debt (H63) | perception of safety among investors (G24) |
| limited options for safe investments (G11) | investment in US Treasury bonds (H63) |
| increase in US government debt relative to GDP (H63) | yields on US Treasury bonds (E43) |