BIS research: risk-taking through foreign investment in US bonds

The risk-taking effects of low interest rates, now prevailing in many advanced countries, (search for yield) are hard to analyze due to both a paucity of data and challenges in identification. Unique, security-level data on portfolio investment into the United States allow us to overcome both problems. Analyzing holdings of investors from 36 countries in close to 15,000 unique US corporate bonds between 2003 and 2016, researchers at the Bank for International Settlements show that declining home-country interest rates lead investors to shift their international bond portfolios toward riskier US corporate bonds, consistent with search for yield. Researchers estimate even stronger effects when home interest rates reach a low level, suggesting that risk-taking in securities accelerates as rates decline.

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