Linkages among US Interest Rates and East Asian Purchases of US Treasury Securities

Recent increases in East Asian purchases of US treasury securities has led to growing concern over its impact on the US economy, particularly on the US long-term and short-term interest rates. The vector error-correction model results revealed the presence of long-run causal relations among the federal funds rate, the 10-year Treasury rate and the East Asian demand in addition to a unidirectional short-run causal relation from the 10-year rate to the Federal funds rate. The variance decomposition and impulse response findings indicated that the Asian demand for US assets has a limited but negative impact on the 10-year US Treasury interest rate. The transmission of the East Asian demand shock on both interest rates was almost immediate. The Federal funds rate is found to have a significant negative impact on the long-term rate.