Foreign Investors and U.S. Treasuries
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Foreign investors in US Treasuries outperform domestic investors on a risk-adjusted basis, with private foreign investors achieving higher Sharpe ratios.
Foreign buyers manage their Treasury holding more efficiently than American investors, "...We instead observe foreigners’ Treasury portfolio at the security-level and find results that strikingly differ from the existing literature…. Foreign investors are prominent in the Treasury bond market, holding just under half of all outstanding Treasuries…Foreigners do not earn a low return on their Treasury portfolios and have higher Sharpe ratios than U.S. investors. And private foreign investors appear to be price sensitive..."
Bottomline, “…Our security-level and aggregate analyses show that private foreign investors perform quite well, earn similar yields as other investors on similar maturity bonds (which is inconsistent with bad timing), on a risk-adjusted basis perform better than U.S. investors, and, consistent with elastic demand, increase purchases and the duration of their Treasury portfolio when CIP deviations decrease. Foreign officials, with much broader objective functions, appear to be price insensitive but do not seem to pay for this, as their Sharpe ratios are higher than other investor types'. Therefore, our analysis shows no support for the notion that foreign investors have poor performance and, other than foreign officials, inelastic demand….”
Evidence, “…Results are in Table 1. Using directly observed portfolios, over the period June 2003-June 2019 private foreign investors had returns (3.77 percent per annum) that exceeded market returns (3.59 percent). The fact that private foreign investors earn higher than market returns is not consistent with the poor performance = inelastic demand notion that is used to support some convenience yield theories. U.S. private investors (4.34 percent) also had higher than market returns. And while foreign official investors' returns (3.02 percent) were lower than market returns, the 57 basis point gap is relatively small and statistically insignificant. Combining the foreign official and foreign private portfolios, we find that foreign investors' return of 3.21 percent is only 38 basis points lower than the market, and the difference is not statistically significant….”
“…Overall, the story of foreign investors that emerges from Tables 1 and 2 and Figures 1-3 is substantially different from what is often portrayed in the safe asset = convenience yield literatures, where foreigners' Treasury portfolios earn substantially less than market returns - with the gap being over 100bps, even 200bps, sometimes almost 500bps - ostensibly because foreigners put substantial value on the convenience properties of holding Treasuries. While at times the literature focuses on all foreigners…often its focus is on private foreign investors (KL, JKL). But direct observation of the yields on each and every Treasury bond in foreigners' portfolios shows quite a different story: the average annual differentials are pretty small, private foreign investors actually beat the market on average, there is no evidence of meaningful skill=timing differentials when looking at bonds with similar characteristics (i.e., within a particular maturity bucket), and most importantly any returns differential seems to be a direct function of risk. To get the highest return, U.S. private investors hold the longest duration portfolio, and that portfolio had by far the most volatility; U.S. private investors had the lowest Sharpe ratio, while the short-duration foreign official portfolio had a high Sharpe ratio.16 If existing literatures rest on foreigners accepting lower yields, Table 1 and 2 and Figures 1-3 show striking counterevidence….”
Alexandra Tabova and Francis Warnock, "Foreign Investors and U.S. Treasuries," National Bureau Of Economic Research, https://www.nber.org/papers/w29313